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Cancellation Notice from Your Credit Card Issuer – What Now?

by MoneyNing

This is a guest post written by Steven Sildon, Managing Editor for CreditCardAssist.com and a frequent contributor in the personal finance community, writing about the pitfalls and practicalities of credit cards, rewards programs, and revolving consumer debt.

With the recent struggles in the economy, more and more people are discovering that credit card companies are drastically tightening the reins on consumer credit across the board. Virtually everyone has been affected by the changes being made in the credit markets. Card issuers have been squeezing off access to credit at an alarming rate by severely cutting the limits on accounts, even for their most creditworthy customers. Recently, card issuers have even started canceling accounts altogether. If you are one of the many who has received a cancellation notice from your card issuer recently, there are a few things that you should keep in mind before you take any action.

First, if you haven’t read the tiny fine print on those disclosure notices that come with your billing statements every month you may be surprised to learn that card issuers have the right to change the terms of any open- ended credit account at their discretion. (The notice to ‘Change the Terms’ on your account letter that we’re referring to is simply a more formal way of saying: “We can do whatever the heck we want to.”)

While the law stipulates that any bank must notify you at least 15 days in advance prior to making any changes to your account, the requirement does not apply to increases in APR’s or finance charges they might levy because of late payments or over-the-limit charges that you make. So if you miss one payment or go over your credit limit by even one penny, the card issuer has the ability to increase your APR effective immediately. While the bank is required to provide written disclosure before making changes, by the time the notice of change arrives in the mail, cardholders quite often only have a few days to adjust to the higher APR that will apply, and, most of the time, the new higher APR’s are significantly higher.

While most people know that making late payments or not making the minimum payment can lead to a drop in their credit score and a drastic jump in interest rates, many people don’t know that card issuers are now actively increasing APR’s and even canceling accounts altogether for customers that haven’t had any recent blemishes on their credit histories at all. Banks and card issuers have the ability to close your account at their discretion, for whatever frivolous reason that they deem appropriate. Card issuers have started to cancel consumer accounts now primarily for “account inactivity”, but while canceling an inactive account may not affect your purchasing power (obviously if you haven’t been using the card, you don’t need that credit), you still might want to consider the negative effect it might have on your credit score.

Understanding the Affect of Canceled Accounts

In most cases, credit card companies are simply canceling accounts because they have been inactive for an extended period. Once an account is closed, however, you no longer have that credit available. If the closed account was one that you’ve held for a long time, you are also losing valuable credit “history”. Before allowing your card issuer to close that account or maybe even if you were considering closing the account yourself, there are some very important factors to consider that could negatively affect your credit. The lengths of your credit history as well as your credit utilization rate are both critical factors in the calculation of your credit score.

Length of Credit History

For starters, a key component of any strong credit profile is a lengthy history of good credit, meeting payment obligations in a consistent, timely manner over a long period of time. It might seem ridiculous to keep that credit card you got in 1983 from The Limited (for that 10% store discount on those leg warmers you just had to have), but the fact is your credit history is over 25 years old on that account, assuming that the account has remained in good standing. Since your credit history accounts for 15% of your overall credit score, you’d be advised to keep those old accounts open (even if you’re no longer in the market for leg warmers.)

Credit Utilization Rates

Another reason to keep those old credit card accounts is to maintain a healthy debt-to-credit ratio, also referred to as a credit utilization rate. The definition of credit utilization is the percentage of your available credit that you’re presently using. The lower your credit utilization rate and the more available credit that you have the better impact it will have on your credit score. For instance, a hypothetical cardholder with 3 different credit cards might have credit limits of $9,000, $15,000 and $18,000 on each respective card. This cardholder never uses either of the first two cards but regularly carries a large balance on the third of $6,000. This cardholder has a utilization rate of 14% of his total available credit ($6,000 divided by the total available credit of $42,000). If the cardholder were to close the first two cards, his total available credit would drop to just $18,000 and his utilization rate would spike up to 33%. Keep in mind that credit bureaus factor in both your total overall utilization rate as well as your individual account utilization. Having a utilization rate of 30% or more on either your total available credit or your individual accounts will have a decidedly negative impact on your credit score.

What to Do After Receiving Your Cancellation Notice

The following is a punch list of essential “to-do” items after you’ve received a cancellation notice from your card issuer:

  1. Contact Your Card Issuer: Understanding the potentially negative effect that it may have, you may be more disturbed by your card issuer’s decision to cancel your account. There is no guarantee that contacting them regarding their decision to cancel your account will make them change their mind but it certainly cannot hurt to make the call. Ask to speak to a manager to see if there is anyway to have your account re-opened. If this is not a possibility (and that may be the common response) you can inquire about opening a new account. While this will not help with your length of history, having credit available on a new account will minimize the damage to your credit score.
  2. Keep Your Utilization Rates Below 30%: At a minimum, you should strive for a utilization rate of less than 30% overall as well as on all of your individual accounts. Ideally, you should keep your utilization rates as low as possibly to enjoy the maximum benefit to your credit score.
  3. Show Activity on Old Accounts that Remain Open: Try to keep your older credit card accounts active by using them for purchases which you are obligated to make each month, allowing you to keep them for the benefit of their credit history. A good strategy is to set-up an “auto -payment” with the card to pay a utility bill, for example, that must be paid each month. In doing so, you’re getting an important bill paid automatically each month that you must pay while you’re also avoiding frivolously charging items on the card just for the sake of keeping the card active.
  4. Don’t Forget About the Big Picture: When looking at the big picture there are several factors that contribute to your overall credit score. Granted, having a good account canceled can be a negative but it isn’t going to be the one thing that makes or breaks your ability to acquire future credit or loans. It is far better to be in a position to have an inactive account canceled than to have an account remain active due to excessive purchases that you can’t afford to repay.

Tagged as: Credit, Credit Cards

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{ 3 comments… read them below or add one }

Roxy February 18, 2009 at 11:04 am

I wish I had read this article sooner. I always pay the full amount on time. I’ve cancelled several cards though because I just don’t use them anymore. I’m glad in the end I don’t have any outstanding payments.

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Fine-Tuned Finances February 20, 2009 at 5:34 pm

With banks closing people’s credit card account and lowering their limits everywhere, I thought it was a bit odd when Wells Fargo tried to get me to sign up for a credit card when I was in their branch today… (Their rewards programs suck though, so I politely declined). On top of that, my citibank account raised my limit by $1,500 last week!

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Science February 24, 2009 at 12:08 pm

This information was very useful and I will definitely be returning here frequently.

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