You count on your credit card to bail you out of emergencies and to finance big purchases on the spot. So it can be shocking when you find the bank has shut it down.
That’s what happened to Nora Dunn, a writer who has traveled to more than 50 countries, in Australia. She tried to use her card to get out of a jam only to find out it had been closed, she wrote on the personal finance site WiseBread.com.
Surprised and angry, she spent “countless hours and days on overseas phone calls trying to rectify the situation,” she wrote. Despite her efforts, she had no luck getting the account reopened.
This scenario is not uncommon, and it happens even to customers who pay on time and aren’t experiencing financial difficulties, says Linda Pack, cofounder of the credit advice site CreditBoards.com.
“Often it just happens out of the blue,” she says.
Surprise! Your account is closed
If your bank puts the kibosh on your account without warning, you might wonder: Can they really do that? In short, yes.
Most card issuers “reserve the right to close an account at any time,” and they’re allowed to do so by law, according to the federal Consumer Financial Protection Bureau.
However, if a bank does decide to close your account, they must notify you of the decision and provide a reason, says Nessa Feddis, a senior vice-president with the American Bankers Association.
They just don’t have to notify you in advance. The Credit CARD Act of 2009, while it put many restrictions on what card issuers can and can’t do, doesn’t specifically address the issue of closing accounts. The law does state that an issuer must give a cardholder 45 days’ notice of “significant changes” in the terms of a card. However, that provision applies to actions like interest rate hikes, not closing an account.
Issuers sometimes do provide advance notice voluntarily. When San Francisco content writer Derek Handova got a letter telling him his Amazon Rewards Card was getting closed for inactivity, Chase let him know about 90 days in advance.
“It’s good customer relations to give some notice in case you were thinking of using the card,” he says.
Why would the bank cancel my card?
If a bank decides to shutter your account, you can expect to receive a notice telling you why. Here are three common reasons an issuer would shut down a card:
1. You don’t use the card – Cards frequently get closed for inactivity, Pack says. Even when an account isn’t being used, it costs the bank money to keep it open, Feddis points out. When a bank is losing money on you, it makes financial sense to take away your credit line and offer it to a consumer who will put it to use. If you don’t want your card closed, use it at least every three months, Pack recommends. “Buy something, even if it’s just a Coke at the gas station,” she says.
2. The issuer deems you a credit risk – If your credit card issuer catches wind of financial difficulties or spots behavior that makes you seem like a bad bet credit wise, they might close your account For example:
- You seek loads of credit. One consumer reported in a forum on CreditBoards.com that a credit union suddenly closed three of his cards, which had a combined credit limit of $70,000. He called to ask why, and was told his accounts had been “flagged” for review because he requested too many credit line increases in the previous year. Some issuers “get alarmed” if you ask them to up your credit limit every month or two, Pack says.
- You lose your job. Credit card companies periodically ask cardholders to update information, including their income. If you recently got laid off or had your salary cut, letting your issuer know about it could trigger an account closure, Pack says. Her advice: If you’re worried, ignore the information request.
- You file bankruptcy. If you have a card with a balance, you’re required to list the account when you file for bankruptcy. However, even if you owe nothing on the account, your issuer likely will find out about the bankruptcy and take away your card.
- You don’t pay what you owe. If you rack up a balance and fail to make the minimum payment on your bill for a certain time period, an issuer typically will shut down your account. For example, the Chase Sapphire Preferred terms and conditions warn that your account may be closed if you go 60 days from the due date without making a payment.
The bottom line: Issuers will nix your account if they spot signs that extending credit to you might be unwise.
“It is not good for the customer or the card issuer to continue to give credit to a person who will be unable to pay,” Feddis says.
3. The issuer goes in a different direction – In some cases an issuer might close your account simply because they’ve discontinued the card or made other changes for business reasons. This doesn’t happen frequently, Pack says. And if it does occur, the issuer probably will offer you the chance to switch to another card.
Getting a card closed can cost you
Inconvenience aside, a problem with having a card closed is that you can lose your rewards. For example, the terms of the BankAmericard Cash Rewards card state that you’ll lose your rewards if the account is closed for any reason. With the Chase Sapphire Preferred card, you lose your rewards immediately if the account is closed for nonpayment or bankruptcy or fraud, but you get 30 days to use your points if the card is shut down for other reasons, such as inactivity.
In addition to costing you your hard-earned points, a card closure can hurt your credit score.
The main way a card closure damages your score is by affecting your credit utilization ratio, the amount of credit limit that is being used. The amount owed across your cards counts for about 30 percent of your FICO score, and credit experts generally recommend keeping your utilization below 30 percent. When a card gets shut down, you lose its credit limit, and, if you have high balances on other cards, your utilization could shoot up.
Getting a card shut down also can affect your length of credit history, which accounts for 15 percent of your score. FICO takes into account the age of specific accounts and the average length of your credit history. A closed account stays on your credit history, but opening a new account to replace an old one that was closed can affect these numbers.
So, what can you do if your credit card company closes your account without warning? Unfortunately, there’s no way to make a company reopen your account. However, you can call and ask them to reconsider the decision. A customer who has a long history and good track record with she issuer likely will have better luck than a credit newbie or someone who has paid late a few times, Pack says.
“But it never hurts to ask,” she says.