Use it or lose it: Issuers quick to close dormant accounts
Consumers risk losing valuable credit history
To paraphrase Willie Nelson, the message these days from credit card issuers to customers who aren't using their plastic is a blunt one -- you might have the money, honey, but you don't have the time.
Canceling inactive or "dormant" credit cards is just another sign of a tough economic climate, industry gurus say. "Closing dormant credit cards is happening more and more," says Scott Crawford, CEO and founder of Debtgoal.com, a debt management advisory firm located in San Francisco. "I worked for HSBC and we were seeing this come down the pipeline a few years ago," he says.
In fact, the credit card industry may be cutting more than $2 trillion in credit lines in the next 18 months -- a 45 percent decline in the total credit card line available to consumers -- according to a banking analyst in a Dec. 1, 2008, article by Reuters. In addition to cutting credit lines and raising interest rates, the cutback could include closing millions of accounts.
The problem for consumers -- whether they choose to close an account or the issuer closes it for them -- is that their credit scores can take a big hit, especially if the canceled card has a long history, a high limit or both.
Crawford points out that keeping inactive cards afloat costs credit card companies money, and that's too stiff a price to pay -- especially when it's easier to shut customers' card accounts down, whether they like it or not.
|A sample of a letter received from a major bank closing a dormant account.
Click for larger image.
"Or not" was the case with Amanda Vega, owner of Scottsdale, Ariz.-based Amanda Vega Consulting, an integrated marketing firm that counts Banana Republic and Eli Lilly among its clients. "I recently got notice that my credit card has been canceled due to nonuse," says Vega. "I really took it as another proverbial slap in the face for actually doing the right thing as a consumer."
Vega says she has no credit card debt, no mortgage problems, a positive business cash flow, and is hardly a credit risk for her card issuers. But the card was yanked just the same. "My credit card companies are basically punishing me for not having some outstanding balance that I have no hopes of paying," she adds. Vega says it's lousy customer service and a bad business practice to close down the accounts of good customers. "Quite frankly, it makes little sense to me ... I would be courting those that have used credit wisely, not hindering them as customers.
"So, if I did need to use credit right now, for whatever reason, and were going to pay a larger purchase off in say three months by using my credit card, I wouldn't be able to -- which is sad because there are so many consumers now begging for lower interest rates and holding balances that will never be repaid. It seems backward to me."Issuers reducing risk by canceling cards
Bleeding red ink, credit card companies aren't apologizing. The industry has been battered by heavy losses so cutting cards may help them to mitigate risk -- and save money. According to an Oct. 28, 2008 article in The New York Times, credit card companies wrote off approximately $21 billion in toxic card loans, and that's just in the first half of 2008. Moody's Investor Service reports that in August 2008, banks wrote off 6.8 percent of all credit card balances, a $1 billion loss for the industry and a 48 percent upward spike in write-downs from August 2007. The future isn't any brighter -- the Times estimates that credit card companies will lose another $55 billion over the next 18 months.
My credit card companies are basically punishing me for not having some outstanding balance that I have no hopes of paying.
|-- Amanda Vega
Amanda Vega Consulting
Consequently, card issuers are targeting dormant customer accounts. Capital One is aggressively closing dormant accounts and has also slashed customer credit lines by 4.5 percent more in the second quarter of 2008 than it did during the same period in 2007. UK-based Barclaycard has been at it even longer, closing 1.5 million credit card accounts in 2006 alone.
Just how many people have dormant credit cards? Credit score giant Equifax, in a July 2007 survey, estimates that 35 percent of respondents said they kept a "spare" credit card open, even if they didn't use it. It could be a boomer thing -- well over half (56 percent) were between the ages of 51 and 60. A majority of Equifax survey participants also said they just had not gotten around to closing their card accounts yet. But that could be a risky move, according to Equifax. "Many consumers keep extra accounts open for an emergency," says Neil Munroe, external affairs director at the credit score company. "However, dormant accounts, where the account is not active but has not been closed, can leave consumers vulnerable to credit refusal and ID theft," says Munroe.
That card you've had sitting around for years is the one where you have developed a nice credit history. You don't want that card to be deactiviated, so use it sparingly.
|-- Lucy Duni
Tips to prevent being canceled
What options do cardholders have when they find out their card has been canceled due to inactivity? It's tough to talk your way back into an activated card, so nip that potential problem in the bud by using your card before it goes dark. "If the card is dormant, and you want to keep it active, go ahead and use it for small purchases and pay it off," advises Lucy Duni, vice president of consumer education at TrueCredit.com, a division of Chicago-based TransUnion. "Just use it with restraint, especially this holiday season -- you don't want to get in too deep."
If consumers have multiple cards, focus on keeping the longest-running one active. "That card you've had sitting around for years is the one where you have developed a nice credit history," Duni adds. "You don't want that card to be deactivated, so use it sparingly." A percentage of your credit score (15 percent) is based on credit longevity, so keeping a long-held card account active works to your advantage.
Consumers may feel blindsided by a sudden notice that their card is being shut down, but according to current federal laws and regulations, card issuers may change any term or condition of the card agreement -- as long as consumers are notified.
Currently, Regulation Z of the federal Truth in Lending Act requires credit card issuers to give at least 15 days' notice of changes in terms of open-ended (credit card) contracts, including terminating accounts. The Federal Reserve Board has proposed sweeping rules changes, expected to be finalized by the end of 2008, including a requirement of a minimum of 45 days' notice of changes.
Credit counselors and consumer advocates recommend card users carefully read notices they receive from issuers and review their user agreements for terms.
Barrie VanBrackle, an attorney at Manatt, Phelps & Phillips in Washington, D.C., says that in the end, it's up to the consumer to protect their credit cards -- and their credit scores. "There are no guarantees these days, and credit card issuers are canceling cards left and right."
She adds: "Consumers can only use the cards. The credit card company, being the issuer, holds all the cards."
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