LAST WEEK JEFF
Larson got a letter from
Larson, a mechanical engineer in Portland, Ore., opened the account, which had a $7,000 credit limit, nearly eight years ago and hadn't used it in three. He had kept the card in part because it was his oldest account, which helped boost his credit score. Larson now plans to find a new card. (A Capital One spokeswoman said the company has notified some customers whose accounts had seen zero activity over the last three years, but added that it's not a new strategy.)
Issuers closing customers' inactive cards isn't uncommon. But card holders may notice more cutoffs these days. As credit-card delinquencies rise, closing inactive accounts helps companies reduce their exposure to risky credit holders. And delinquencies are a growing problem: In February, the rate was 4.5%, about 16% higher than February 2007 and the highest it's been since March 2004, according to Moody's. (Delinquency refers to credit-card payments that are at least one day late.)
Even for people like Larson, who carry little to no outstanding credit-card balances but keep an extra card in case of emergency, an involuntary closure could not only take away a standby line of credit, but negatively affect their credit score as well. To prevent that from happening, consumers need to be proactive about managing their credit, says Linda Sherry, spokeswoman for Consumer Action, a consumer rights organization in San Francisco.
Issuers close credit lines for several reasons. One is if the card holder is deemed unprofitable, which is essentially the case when the card goes unused, says John Ulzheimer, president of consumer education for Credit.com. "Even if you don't use your credit card, you cost them money by being in their system," says Ulzheimer.
Companies might be increasing their closures now in the wake of new rules proposed by bank regulators that would impose greater restrictions on the credit-card industry. If a card holder is delinquent on an account, the issuer may close it to mitigate further risk, Ulzheimer says, or increase the interest rate. (Under the proposed regulations, credit-card companies would have to give consumers more time to make payments before they're considered overdue, and they'd be limited in raising the interest rates on outstanding balances.)
How it hurts
The lower your utilization rate, the higher your credit score. For example, if you have an open credit card with a $2,000 credit limit and a $1,000 balance, you're 50% "utilized" on that account because you're using half of the credit limit. If you had a second open, but unused, card with a $2,000 credit limit and a $0 balance, your utilization is 25% because you have $4,000 in credit limits and $1,000 in balances.
If one issuer decides to close an account because of inactivity, that removes some of your unused credit from the calculation. If you're carrying a balance on another card, your utilization percentage goes up and your credit score comes down.
An issuer-closed credit card can ding your overall credit profile in another way. While it doesn't directly take the card cancellation into the score's calculation, Fair Isaac does make a note of it on your profile. And that notation can have an impact on how lenders perceive your credit risk, says credit expert Erica Sandberg. If lenders see your account was closed by the issuer, "they certainly may proceed with it as being negative," she says.
Don't get cut off
Use it or lose it.
With banks closing down access to capital as they are now, having a backup card is useful, says Ulzheimer. But too often credit cards are left dormant in wallets like old ATM receipts and library cards. Ulzheimer advises consumers to use them occasionally so your credit-card issuer has no incentive to close your account.
Look at junk mail. Card issuers don't have an obligation to warn customers about an impending closure. Card holders are generally notified after the fact, and that can be dangerous: If you never use the card, any notification you get from the issuer will probably get thrown away as another unwanted solicitation, leaving you to wonder why you didn't get that car loan. So whether they're active or inactive, keep track of your cards and think about your bigger credit picture, says Sherry.
Call your issuer. If you are notified that your card issuer closed an account you'd like to keep open, Sandberg advises asking the company to reconsider their decision. Tell them you'd like to keep it open and you do intend to use it. "If you've had the card a long time and it's positive, it's working in your favor," she says.