You’d think having good credit and being careful with your spending would make your creditors like you. But your credit card company might not. According to a Feb 12th Smartmoney.com article, creditors have been reviewing the accounts of their most credit-worthy customers–and if their balances aren’t high enough they are slashing credit limits or closing the accounts. Discover reported that in 2008 it closed three million accounts due to insufficient activity. Many times the only way for even long-time customers in good standing can keep their accounts is to spend more. And it’s ironically the account holders with the highest credit scores that get targetted the most for this treatment!
From the banks’ perspective, closing less-active accounts may make financial sense. They can decrease their potential liability and fraud exposure and drop the expense of maintaining accounts that don’t yield much interest income or generate many transaction fees.
For consumers, however, account closings can cause major inconvenience and crush their credit scores. Your credit utilization ratio–the amount of your debt in relation to the amount of your available credit–makes up 30% of your score, according to Fair Isaac Corporation (FIC), the company that calculates the widely-used FICO credit score. So when an account is closed, you have less credit available to you- and the ratio immediately jumps higher. A person with a solid credit score of 720 or so, whose utilization ratio jumps from 35% to 75% after an account is closed is likely see the FICO score drop by “several dozen points,” to somewhere in the 600s–a lot less than the 760 (or higher) score needed to get the best rates from lenders.
What can consumers do? Don’t compromise your financial standing by charging more than you would ordinarily spend. But if you can put regular expenses like gas and groceries on your card and pay it off each month you may be able to save your limit and keep your account. If a company puts too much pressure on you to increase your spending, apply elsewhere and transfer whatever balance you have to the new card. That way you can keep your utilisation rate down and your score up.
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(11 votes, average: 5 out of 5)
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I’m so sick of credit card companies pushing consumers around. Consumer reports did a whole expose on them. I would rather get a line of credit against my house abd use that instead of credit cards when I need money. And I use a debit card for convenience. And an Amex that I pay off each month for online transactions. There’s a really good site called http://www.card-ratings.com that tells you how you can make money by using cards wisely and how to pick the best ones.