Is It True That Credit Card Grantors Can Close An Individuals Accounts Without Notice?
Many of us have found ourselves in a position over the past 5-7 years where one or more of our credit cards were surprisingly closed by the creditors. It is usually a shock and never seems to come at a good time. Even those with excellent credit and no need for the extra credit card feel slighted when they find out they have been rejected for continuing use of a credit card. Some even try to fight the creditor to re-open it with no success. The worst is when a creditor closes a credit card on us right before we are applying for a mortgage, causing our score to plummet. When balance to limit ratio’s change due to a reduction in the aggregate limit, it could drop scores substantially, depending on the current balance.
For example, if you have a total revolving limit of $50,000 with a $25,000 balance and a card closes that has a $25,000 limit, you have gone from 50% balance-to-limit ratio to 100%. Depending on the current FICO scores, this action could drop your scores 50-100 points. This drop could cause a rejection for a mortgage or a much higher interest rate, costing hundreds-of-thousands of dollars over the term of the mortgage.
How could this be that creditors are allowed to just close credit cards on us without notifying us in advance? Isn’t this wrong and illegal? Unfortunately, the answer is that it may be wrong to us but it is completely legal. Since the Credit Card Act of 2009, many changes were made to protect the consumers interest, but did not include regulations on creditors closing credit cards.
It’s at the creditor’s discretion whether to close an account
Creditors can close accounts for a number of reasons and some seem quite legitimate, like late payments occurring, going over the limit, and filing a bankruptcy. Creditors can also watch your credit reports and assess your spending, payment patterns, and management habits. If they feel you are carrying balances with other creditors that might make you a riskier bet they can shut you down without warning. Inactivity of credit is a common reason creditors close accounts as well, so if you don’t use your credit card accounts at all they may pull the plug. Also, if you open too many accounts in a short time your ability to manage all of that new credit at once may be questionable.
A creditor can close an account without informing the consumer. When creditors close accounts due to poor credit they have to notify the card holder 30 days after the closing. Although it may seem wrong to take this action against the consumer without warning, there are valid reasons. Although many consumers would not take a negative action some would spitefully rack up charges once they know the account is closing, having no intention to pay them back.
Here’s how consumers protect themselves from credit cards closing by the grantor:
- Keep low to moderate balances. Trying to stay at 20-40% aggregate and individual balance to limit ratios on credit cards is a good way to keep the credit risk alarms from going off. (To be clear, for the best scores we recommend staying below 10% of the aggregate limit.)
- Make sure all credit cards are active a few months out of the year is a great idea. Consumers don’t have to charge a lot of money in those few months they just need to make a small purchase.
- For those who have many cards and only carry a few with them they can put recurring auto pay memberships on the cards they don’t carry like EZ pass, gym memberships, etc.
- Make sure your credit is excellent and keep it that way, this will insure you look your best for those inquiring. Those with poor credit should search out an excellent credit repair company and get a free assessment of what can be done.
- Many credit monitoring products help you daily, weekly, monthly to evaluate your credit standing while watching your balances. This is a great way to stay on track of your credit activity.
- Only opening new accounts when you have strategically decided it is the right time and the right credit account. Randomly opening credit is never a good thing.
Some consumers are under the false impression that if credit is closed by the consumer it impacts them less than when the creditor closes the account. This is totally false. The scores can drop just as much depending on many factors including the balance to limit ratios on revolving credit.