Should You Close Business Credit Cards if Carrying a Balance?

Closing a business credit card account that has an outstanding balance can be tempting, especially if you’re trying to reduce debt. However, it’s important to carefully consider the potential consequences before taking this step.

In this article, we’ll walk through the key factors to weigh when deciding whether to close a business credit card with a balance. We’ll look at how it could impact your business credit score, ability to pay off the debt, and more. We’ll also discuss some alternative options to account closure that may better support your business finances.

The Debt Remains Your Responsibility

First and foremost, it’s critical to understand that closing a credit card does not erase the balance you owe. When you close an account, you’re simply cutting off your ability to make additional charges – you’re still on the hook for paying off the existing balance.

The credit card company will continue sending you statements and charging interest until the amount is paid in full. If you stop making payments after closing the account, the delinquency will be reported to the business credit bureaus and negatively impact your business credit score.

Bottom line: closing a card will not make an outstanding balance disappear. You still have to pay it off.

Higher Interest Rates

Many business credit card companies will hit you with a penalty APR if you close an account with a balance. This means the interest rate could jump significantly – sometimes over 30% – making that balance much more expensive.

Before closing a card, read the terms and conditions to see if a penalty APR applies. Then, crunch the numbers to determine how much extra interest you’d pay over time with the increased rate.

In most cases, it’s smarter to keep the account open and continue paying the lower interest rate if possible.

Loss of Credit Line

Closing a credit card account also decreases your total available credit, which can negatively impact your credit utilization ratio. This ratio compares your total balances to your total credit limits.

Let’s say you currently have $10,000 spread across two cards, each with a $10,000 limit. Your utilization is 50% ($10,000/$20,000). If you close one card, your utilization jumps to 100% since you now only have $10,000 available credit.

Higher utilization tends to lower credit scores, so be mindful of this change. Keeping accounts open with available credit, even if unused, can help optimize this important metric.

Lost Credit History

The length of your credit history also factors into your business credit scores. When you close your oldest credit card, you lose this record – which could mean taking a hit on this portion of your score.

Before closing a long-standing account, see if you can product change to a different card with the same issuer instead. This allows you to keep the history while switching to a potentially better product.

New Inquiries

If closing a card leaves you without enough available credit, you may need to open a new account. However, credit inquiries from new applications can also cause temporary dings to your business credit scores.

Before closing an account, evaluate whether you’ll need to replace it right away. If so, the short-term score impact from the inquiry may outweigh the benefits of closure.

Alternatives to Closing an Account

Given the potential drawbacks, immediately closing a credit card account with a balance often isn’t the best choice. Here are a few alternatives to consider first:

• Ask the issuer for a lower interest rate. They may be willing to work with you, especially if you’ve been a long-time customer.
• See if you can transfer the balance to a card with a 0% intro APR. This pause on interest can help you pay down the debt faster.
• Pay as much as possible toward the balance each month to pay it off quickly while keeping the account open.
• Stop using the card but keep it open to maintain your credit history and available credit.

The right option depends on your specific situation. Run the numbers to see which approach saves you the most on interest charges while limiting damage to your business credit.

When Account Closure May Make Sense

There are certain situations where closing a small business credit card with a balance can be reasonable:

• You can pay off most or all of the balance before closing using business income or savings.
• You have other old credit card accounts, so closing this one won’t drastically impact your history.
• The card has egregious fees that outweigh the closure consequences.

However, it’s still smart to crunch the numbers and consider alternatives before making the final decision.

How to Close an Account

If you determine closing a credit card is the right choice, here are the steps to take:

1. Pay down as much of the balance as possible first.
2. Contact the issuer to close the account – this prevents additional charges.
3. Opt out of promotional emails to avoid temptation to reopen it.
4. Destroy the physical card by cutting it up.
5. Continue paying at least the minimum each month until the balance is gone.
6. Monitor your business credit reports to ensure the account is marked “closed” rather than “late.”

The Bottom Line

Closing a business credit card account with an outstanding balance requires careful thought. While it may seem like a fast way to reduce your debt burden, it can actually make repayment more expensive in the long run.

Before taking this step, be sure to consider alternatives like balance transfers, lower APR requests, or temporarily stopping card use while keeping it open. With a balanced approach, you can pay off your obligation without unnecessary damage to your business credit.