Damaging Good Credit

Credit Companies Warn: Use Your Credit Card or Lose It

A consumer rights organization based in San-Francisco, Consumer Action, warns US cardholders that their credit card accounts may soon be closed, and the reason for the closure may seem to customers rather offensive, to put it mildly. Today, if your card company has noticed you to be inactive about using your plastic for three years, it has the right to close your account without a beforehand notice.

It is twice as disappointing to get a card closed if it has no default payments, high credit limit and good debt ratio. Nevertheless, card closure does take place in some of US good credit households.

Why do companies make such anti-consumer arrangements and how can you avoid losing your card once you are at risk?

Well, as to the reason. It might be simple and natural to suggest that companies' decision to close inactive credit card accounts may proceed from the Federal Reserve's new proposed credit rules that operate to curb restrictions on the companies' unfair practices.

Until recently the predatory practice was to keep a delinquent account open to make whatever profit possible out of the account owner. Now that the Fed's proposed regulation requires giving a customer more time to cover bills, companies chose to cut off the customer as a higher credit risk and less profit.

We only guess at the reason being the Fed's new regulatory proposal, though it is more than likely to be truth.

The indubitable ground for credit card companies to close your inactive card is a rush to profit and fear to lose it. If you do not use your credit card, how would all those credit card rates, fees and a whole lot of other charges bring profit to banks?

Even if your account is in good standing and you have been loyal to your company for many years, your card may be closed. It might be rather distressing to lose enviable credit rewards and beneficial rates offered by your plastic, but just simply holding a card and not using it may cost your company money.

A distress may turn into deep frustration as you find out that your good credit got damaged because of the closure. That is too much, you might think. But before you do, ask yourself if you realize what a debt-to-available-credit ratio means.

To put it simple, when a credit card is closed, your available limit drops while your balances on other cards stay the same. So, the credit utilization rate is high, which is rather unfavorable for your credit score.

A drop in credit cores may also be caused by the fact of the closure itself, which shows you as a bad credit risk for other potential lenders. If your account was closed by your card issuer, it is logical to assume that you might be a completely irresponsible delinquent cardholder.

The only way to prevent this from happening to you is to use your credit card at least few times in a year. While the card purchases will not hurt you (considering that you pay balances in full), it will still bring at least some small profit to your bank.

Just occasional credit card transactions will rid your company from the incentive to cut off your account.

Doug Nicholas

Doug Nicholas, a financial consultant by profession with a Masters degree in International Business from Brown University, is also an ardent writer. Though he has a full time job at one of the companies listed on Wall Street, he does manage to squeeze in time to follow his passion. He puts his ideas to words in his articles related to finance and business.