Offsetting the impact of a canceled credit card

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question for the expert Dear To Her Credit,
I just got a surprise from E-Trade! I found out that my long-standing credit card has been canceled. It expired in April and was unilaterally canceled by E-Trade. I have been paying my bills all along, but I didn't use the card very frequently, so I guess I wasn't profitable for them. Will this cancellation, not initiated by me, negatively impact my credit score?   -- Johanna

Answer for the expert Dear Johanna,
This credit card cancellation won't hurt your credit score any more than it would if you had closed the account yourself.

However, having an account closed may cause a slight dip in your score, depending on how long you have had the card, how much credit you have remaining on other cards and how much you owe on those cards.

For example, say you have two credit cards with a credit limit of $5,000 on each, for a total credit limit of $10,000. You didn't use one card, so its balance is zero. The other card has a balance of $5,000 on the day it reports to the credit bureau. Your credit utilization ratio is 50 percent ($5,000 of $10,000 available). That's an acceptable ratio that shouldn't hurt your score, although many experts recommend keeping your ratio below 30 percent.

In this example, if the zero-balance card is closed, you're left with one card with a $5,000 limit and a $5,000 balance. That's a 100 percent utilization rate, which makes alarm bells go off in the credit scoring world. Your credit score suffers -- even if the $5,000 balance is temporary and you pay it off every month.

On the other hand, say you have the same two cards with the same $5,000 credit limit on each. You never owe more than $1,000 total. If one card is closed, your credit utilization percentage changes from 10 percent to 20 percent. It's still well under 50 percent, so it shouldn't affect your score.

Another way the closure of this account may affect your credit score is if it was one of your older cards. Card loyalty pays off, as accounts you've held longer have a positive effect on your credit history. Your history on the E-Trade card doesn't go away immediately when the card is canceled, but it will eventually drop off in time. If you have two or more other credit cards and more than twice as much total available credit as you are likely to use, you probably don't need to do anything at this point. (I like to keep at least two cards, just in case there's a glitch on one of them.)

If you don't want more cards, but you are afraid you might use most of your available credit, even for short periods, consider asking your credit card company for an increase in your credit line. If you've been a good customer, one phone call is often all it takes to get your limit raised.

Another way to keep your credit utilization rate lower is to pay your credit card balances sooner and more often. There's no reason you can't send a payment before you get your bill. With online bill pay through your bank, you can even set up twice-a-month payments to help keep the balance lower at all times.

Of course, you can always replace your E-Trade card with another one. You can expect a small drop in your credit score -- perhaps seven points or so -- when you apply for a new credit card. That drop is temporary, and the increased credit limit should more than make up for it in time. Just don't apply for a new card right before you need a new mortgage or other major loan, and you should be fine.

See related: Protect credit scores when canceling a credit card, Good credit history doesn't go away when card is canceled 

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Updated: 10-15-2018