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Credit Card Applications » News » Other » Dumping Credit Risk

Dumping Credit Risk

February 11, 2008
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Applying for a Credit Card after Canceling One

Liquidity crisis initiated in the USA has spread over to the UK and recently as many as 161,000 UK cardholders, notably Egg customers, have been affected. Egg has targeted 7% of its customer base in withdrawing maxed out credit cards and the customers expressed concerns as to how the cancellation will show up in their credit reports and whether it will have a detrimental effect on their credit ratings.

Experian, one of the major credit reporting bureaus, has reassured the customers that the procedure will not do any harm to the account owner if the latter has no outstanding balance on the card.

Why withdraw the customer's account if the customer always pays in full and on time? What's the purpose of the credit cards cancellation and how is it expected to exert both the sides - the lenders and the cardholders?

Credit card crisis is continuing to affect lots of customers, defaulting and responsible alike, in various ways. The reduction of credit limits, the stop to cash advances and toughening credit criteria are some of them.

A new one, started by Egg, the UK Internet bank, is cancellation of a credit card once any outstanding balance on it has been cleared. Carrying no balances on credit cards is typical of good credit consumers, those who use their plastics to advantage, and so it is natural that most of them are worried about the outcome of the withdrawal.

However, the cancellation is not going to cause any detrimental impact on the account holder's credit history. As all the balances have been paid off, the account closed will be recorded in your file as "settled", not "cancelled".

While the "settlement" is not going to bring down credit scores, it is certainly not going to benefit the cardholder, either.The lender is actually dumping the customer, depriving him of a profitable credit card deal which has lowest interest rates or no fees as a result of responsible and wise credit use and timely payments.

This is a smartly worked-up strategy on the part of the lender to stop losing revenues and dump credit risk, or in other words, unprofitable cardholders. Customers who always pay their bills in full and on time do not incur interest and thus are not of any value to the lender.

Banks make profit at the rates and fees you accumulate when missing or skipping a payment. And if you do not do this, they can't make money of you. Instead, it's you who profit from their various perks and reward programs.

So, Egg cancels credit cards of unprofitable customers, without, however, damaging their credit scores. It means if a customer decides to apply for a new credit card, the lender, when making the inquiry, will see nothing but that the account has been "settled". It will look as if the customer cancelled the card himself on paying off the debt.

Nothing bad but not so much good as well, except maybe for one thing - you will have fewer credit cards, and it will make you look less risky and a better credit risk for a potential lender.

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