Card account isn't closed if annual fee still charged
Barry Paperno
Dear Speaking of Credit, I have a credit card that expired four years back. I have not renewed it, but I have a balance which I still paid until now. But every year the company charged me an annual fee, even if I am not using the card anymore, and it’s been expired for years because I am residing now in a different country. I have complained to the company asking why I was continuously charged even if I am not using their services anymore. Is this legal for them to charge me? – Eva
Dear Eva, Despite your card having expired four years ago, the fact that you’re continuing to be charged annual fees tells me the card company still considers that card to be open in at least one respect – charging that annual fee. I’ll leave your question of its legality to the legal experts, though, legal or not, most of the major credit card lenders do not charge an annual fee once a card has been closed, regardless of the remaining balance amount.
Perhaps rather than formally closing the card, you simply assumed that when you didn't get a new card upon the card’s expiration, the account was essentially closed and that no further annual fees would be charged. If so, you may want to consider this another one of those situations where one should not assume.
While not going so far as to permanently close a card account, there can be a number of reasons – past-due or over-limit balances, for example – why a card company may decline to issue a new card when the old one expires. In such cases, denying a new card can help protect against additional purchases the lender fears may not be repaid on time or at all.
The issue you raise brings to mind the larger question of what exactly constitutes a truly “closed” card account, not only with regard to the effect on annual fees, but also in how credit scores may be affected. For instance, is an account in which the card has simply been allowed to expire without a new one issued truly closed? Does a card have to be formally closed by the cardholder or lender to be free of additional annual fees? Is a card considered closed if a balance is still owing on it?
Expired card. If your card is past due or over-limit and the card company has decided to withhold issuing a new card until the situation has been corrected, the card might not be considered officially closed in the eyes of the lender or reported to the credit bureaus as such, but the various fees will go on as always. For scoring purposes, the payment history, balance, credit limit, age and all other scoring factors continue to be treated the same by scoring formulas without regard to whether a new card has or has not been issued.
Card closed with a balance. Unlike what may have been your experience, once again, most major card issuers don’t continue to charge an annual fee after the cardholder has requested it closed – even when a balance remains. For as long as a balance remains, however, expect late, over-limit and perhaps other fees to be applied when appropriate. And as with the expired card example above, the credit scoring formulas consider a closed account with a balance as “open” for all categories of scoring.
Card closed with a $0 balance. Here is where the good news of having eliminated a debt once and for all can be tempered by a couple of negative credit scoring impacts following the reporting of a closed/$0 balance account to the credit bureaus – with one occurring immediately and the other many years later.
Immediately upon being reported as closed/$0 balance, and though continuing to contribute positively to all length of credit history scoring factors that make up about 15 percent of your score, the account’s now 0-percent utilization will be ignored in all of the credit utilization (balance/credit limit percentage) calculations that help make up the highly influential amounts owed scoring category (30 percent of the score).
As a result, if your utilization is already low due to low or $0 balances on other cards, there should be nothing to worry about, as no rise in utilization should occur. However, with utilization on the higher side – say, more than 25 percent – the removal of the closed card’s limit can cause those remaining balances to make up a larger proportion of your available credit, increase your utilization percentage, and lower your score.
The long-term effect of a closed/$0 balance card is that damage can be done to your score when the account is eventually removed from your credit report and thus excluded from your score after about 10 years. This removal of what, by then, is likely to be one of the oldest accounts on your credit report could lower your score by diminishing those account age-related factors that, while not having quite the effect of higher utilization, can lower your score by enough points to make a difference in your ability to obtain new credit.
What to do? Whichever of these scenarios apply to you, and whether you’ve already paid this card in full or expect to do so eventually, you’ll want to be sure that any future annual fee cards you open are issued by a bank that allows you to close the card – balance or no balance – without continuing to owe that fee. Or even better, avoid cards that charge an annual fee entirely. This way, not only will you save money on the fees while it remains open and in use, but by not having to close the card when paid off to avoid the fee, the account can remain on your credit report and contribute positively to your score indefinitely.
