If your card issuer reopens your card as a new account, it could negatively affect your credit score. However, if you pay, make your payments on time and keep your balances low – the damage should be minimal and temporary.
Dear Keeping Score,
I rented a car and they charged me over my limit. The creditor shut down the card for a month. My credit report says it was closed but the creditor said they did not close it. They said it would reopen as a current account not a new account. Can I trust that they will open back as a current account? – Matt
Oh ye of little trust! A more apt question is, can you be trusted not to do this again in the future? From where I sit, you were the one who failed to stay within your limit. It may well have been accidental, but nevertheless, you’re the one who messed up.
An important thing to remember about credit reports is that they are fluid and ever-changing. It is also true that mistakes are made and made often. This is why it is important for consumers to know what is in their credit report because it is usually up to the consumer to get those mistakes corrected. Because of that, I can somewhat understand your lack of trust.
But let’s talk first about how this happened. First off, a little perspective: what would you do if you agreed with a friend that they could spend $500 of your money and they went ahead and spent $1,000? I’ll bet you’d shut down their ability to spend anymore until they paid you the amount charged over the $500 and promised not to do it again.
See related: When can an issuer close your credit card account?
Your account may be closed because you didn’t opt into over-limit fees
Your situation is similar. You have fallen afoul of the Credit Card Act of 2009. It addressed, among other things, the issue of over-the-limit charges and fees. Prior to this law, card issuers routinely allowed consumers to go beyond their credit limit and then charged them a hefty fee for doing so. The law says that unless the consumer has opted into over-limit protections, over-limit charges must be declined.
I’m going to assume you did not opt into those protections since you say your creditor “shut down the card for a month.” If you did not opt in, that also means that your creditor could not charge you a fee for going over the limit.
In other words, no fee means no more charging over your limit for free! You don’t mention that you were charged a fee in your question, but I do want you to know that just in case.
Just so you know, I think not opting in is a good thing. If you do that, you are giving yourself permission to go over your credit limit, and that is something you should never, ever do. Going over the limit means you have blown out your available credit and your credit score is going to suffer from that action.
Maxing out your card will hurt your score until you pay down the balance
Speaking about your score, how much you owe counts for about 30 percent of your FICO score. A major score factor is your utilization rate. This is how much of your limit you’ve used (the lower the better). Keeping your balances to less than 25 percent of your available credit (or below) is best for both your credit score and your overall financial health.
You were in excess of 100 percent when you went over your limit … ouch! But you can easily recover from this. FICO looks at current utilization only, not your history. So, with the next reporting of the account you should be in much better shape.
VantageScore 4.0 however, looks at over-limit behavior a bit differently. It is still a major factor (spread over multiple categories: utilization, balances and available credit), but VantageScore uses trended data. This means in your case, it counts your over-limit event for a longer period of time than the FICO score does.
As for trusting your creditor to do what it said it would do, I would say you should within reason. Ronald Reagan said it best: “Trust but verify!” That also means that you will need to hold up your end of the deal, which means paying the card back down to below your limit.
While the creditor probably can’t charge you an over-the-limit fee, you did still rent the car and incurred the charges, and you owe the creditor for those charges. I would not expect the creditor to reopen the account until you have brought your balance below your credit limit.
See related: Did Macy’s ruin my credit when it closed, reopened my card account?
If you end up with a new account, don’t despair
It may take a few months to get everything all sorted out. This will mean you will need to stay on top of what is going on with your credit report. You may have access to free credit reports from one of your creditors, but if not you can visit www.annualcreditreport.com to get a free report from each of the three credit bureaus – Equifax, Experian and TransUnion.
What I would suggest is getting only one report at a time. Spread the others out over a year’s time. While there may be some minor differences in each report, all current and any new accounts are going to show up on each no matter what.
If when all is said and done, you do end up with a new account after all, don’t despair. Take this as a lesson learned and move on. It is true that closing accounts and opening new ones can have a negative impact on your credit score, but in the long run, it’s not all that much. Especially not when compared to maxing out a credit card, which has already happened.
What will help you the most will be to get these charges paid off and then continue to practice good credit habits from here on out. You can then rest assured that your score will recover in short order.
Remember to keep track of your score!