Mad at card issuers? Don't take it out on your own credit
Think twice before closing little-used credit card accounts
By Gary Foreman
The New Frugal You
Dear New Frugal You,
I have excellent credit, but am getting quite perturbed at the situation with credit cards. I have a few cards I don't use often, or don't want to put anything on right now due to the economy. If the issuers can close an account for NOT using it, then how does it affect MY credit score? This is outrageous!!! Everyone is going after the consumer every which way -- do we have no help anywhere? -- Cathy
Cathy, you're right. Since 2008 banks have reduced credit lines by nearly 25 percent. As the economy slowed and housing prices slumped, banks wanted to reduce their potential risk. One way to do that was to reduce the amount of credit that they were willing to extend to credit cardholders. Many of the reductions seemed pretty arbitrary. Some banks reduced available credit just because a card hadn't been used recently or because the cardholder lived in a ZIP code where home values were particularly hard hit.
Your question, then, has three parts:
- Can credit card companies reduce your credit line?
- Would that hurt your credit score?
- And, finally, what can you do to protect your score?
The simple answer to Part 1 is that, yes, the credit card companies can reduce your available credit pretty much any time they want and for any reason. The Credit CARD Act of 2009 does not prevent lenders from closing accounts or slashing available credit lines.
And, in a way, that's understandable. A credit line represents a lender's willingness to loan you a certain amount of money. No law should force someone to lend you money or prevent them from withdrawing a prior commitment to lend money.
Moving to Part 2, what happens to your credit score if a bank does slash your credit line or close an account that you're not using?
Something called credit utilization makes up 30 percent of your credit score. That's the percentage of the available credit that you've already used.
If you owe $1,000 on a credit line of $5,000, only 20 percent of your available credit is used. But, if your limit is dropped to $1,500, then suddenly you've already used 67 percent of what's available.
A reduction in your credit limit is much more critical if the new limit is only slightly above the amount you owe on the card. You want to keep the amount used to less than 30 percent.
The length of credit history accounts for another 15 percent of your score. So there is a difference between closing newer and older accounts. Closing a fairly new account could actually improve your score. On the other hand, closing a long-standing account would not be helpful.
As for Part 3 -- what you can do to protect your credit score -- the most important step is to pay down any balances. That way even a drastic cut in your available credit will leave your credit utilization ratio low.
Next, if your credit line is reduced, call the credit card company and ask for reinstatement of your old credit limit. You have no assurance that your issuer will comply, but a phone call is an inexpensive investment.
Also, work to keep your older accounts active. Use your card for a purchase you would be making anyway (for instance, groceries) and pay the entire bill when it comes due.
In the past 10 years your credit score has become important to your financial well-being. You're wise to monitor it closely and take steps to protect it.
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Published: November 18, 2010
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