Why issuers close credit card accounts

If you've ever tried to use a card, only to find out the issuer closed your account, you know how frustrating and possibly embarrassing it can be. Your issuer could close your account for a few reasons; some you can control, and some you can't.

"Sometimes they just close the card because it's a basic credit card and they're no longer offering it out, but most of the time it's because of late payments or some kind of payment default," says Richard Moxley, author of "The Nine Rules of Credit" and spokesman for eCredit Fix, which helps consumers learn about improving their credit scores.

If an account closure takes you by surprise, know the common reasons why, how it'll affect your credit and what you can do about it.closed-account

Common reasons for closure
If your card is suddenly closed, these four events are most likely the culprit:

1. Your card is delinquent.
You'll likely be OK if you miss one payment, but after a few months of no repayment, your issuer could pull the plug. In those first 90 days, you might receive mail and phone calls from your issuer, or even computer-generated letters from a law firm urging you to settle your account.

"Failure to make payments and heading into delinquency is a big negative," says Laurie Campbell, executive director of Credit Canada,
a non-profit credit counseling firm. "You're not upholding your end of
the bargain as agreed."

Skipping payments will also mar your credit history, which could give issuers a reason to consider closing your account. You come off as a potential liability, she warns. "It'll add up to having a history of this habit," she says. "It won't look good."

2. A joint account holder closed the card.
Experts often advise caution when signing up for a joint account, and for good reason: one partner can make decisions for both account holders. That includes requesting a credit limit increase or an account closure. As long as the account is at $0, your partner could close the account without consulting you.

3. Your issuer changed terms and conditions.
Mergers, acquisitions or the sale of accounts could leave you in the crossfire as your issuer makes business deals with other companies.

"[A bank] can sell a whole bunch of their credit card customers to [another bank]," says Moxley. "Lenders will buy other lenders' accounts and all of a sudden you can have your account closed or cancelled because you were issued a new card by the new lender. It can be switched on you without any say or knowledge."

He says issuers aren't required to give you a heads up if they plan to close your account. Keep an eye on any mail your issuer sends you. Often, Moxley says, people will throw out notices that aren't their statement, but these notices often contain fee changes or new clauses.

You can also stay on top of what's happening with your credit card in the news, Moxley says. There will often be hints of acquisitions or other major changes.

4. Your card is inactive.
Major Canadian banks will slap on "inactivity" or "dormant account" fees if you haven't used your credit card for 12 consecutive billing periods. If that fee isn't enough to get you to start swiping, the issuer may just close the card.

TD Canada Trust, for example, shuts down clients' cards if they go untouched for two years. Others will tack on the inactivity fee and eventually close your card.

Toll on your credit score
Almost no credit card closure comes without a price. There are a few ways your credit score is hit when a card is closed. Likely, the most impactful outcome is your credit utilization ratio rises. Your credit utilization ratio is the ratio of debt to your total credit available.

For example, if you had five credit cards with $1,000 limits on each and $1,500 of total debt spread across the cards, you're only using about 30 per cent of available credit, the maximum recommended percentage.

If one of the cards is cancelled, however, your debt utilization ratio suddenly climbs, and your credit report will suggest you're using too much of your credit. Your score takes a dip.

Another effect you might see is a loss of positive spending history. If you've had a card for years and stayed on top of payments, that card's history and your rapport with the credit card issuer go a long way toward showing you're a great candidate for managing debt. Once it's closed, that narrative is no longer as relevant as your other, more recent cards.

"The longer you've had a card or account opened, the more established it is," Moxley says. "An active account is generating your credit score and building it so when an account gets closed, the scoring system sees that it's no longer current and not as important. It can drop your score quite dramatically."

Moxley says the more accounts you have established, the less one card closure will hurt your score.

Preventing the damage  
To ward off a card closure and the ensuing credit score damage, make sure you stay on top of your payments. Pay every month on time, or your score will suffer even before your card is closed.

To avoid inactivity on a seldom-used card, try making a single payment on the card each month, or setting up a recurring charge (and an automatic repayment) so that it's always in rotation. If you're using a joint account, communicate with the other party to make sure you're both ready before closing the account.

As an added precaution against an unexpected closure, make sure you don't have just one "old reliable" card in your wallet. While some experts advise consumers to hang onto a single credit card for emergencies, Moxley suggests you have more than one credit card with a good history. That way, if an account closes, you'll still have others in good standing that'll speak for your credit history.

See related: How to fight credit card inactivity fees, 6 steps to close your cards the right way

Published June 25, 2015

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