Have you ever had a credit card account closed just when you needed the extra spending power it offered? It seems that’s not an unusual situation. News reports from 2020 blamed the pandemic’s impact as millions of Americans had their credit card limits slashed or their card accounts closed.
While you can manage your account responsibly and avoid being in this situation, you could still find yourself impacted by a card closure. Adding insult to injury, a card issuer doesn’t even need to notify you in advance if it decides to go ahead and close your account.
Why would an issuer close a card account anyway?
You do not actively use your card
If you carry multiple credit cards and tend to favor some of them more than others, it may be that you are just not using one of the cards. Depending on your spending pattern and the rewards the cards generate, it may be that you rarely turn to this card to fund your purchases.
That sort of strategic spending is good for you, but it isn’t in the best interest of the card issuer, particularly if the card doesn’t carry an annual fee. The issuer is trying to generate business off your account and has allocated a part of its lending power to your account. If you don’t use this card, your account remains inactive and does not generate the fees the issuer would receive were you to use the card.
You didn’t accept new terms
It could be that the issuer changed the terms of the card and you did not accept them. For instance, you may have opted for a card based on its appealing rewards program, which you thought would more than offset the card’s annual fee. Well, the issuer can also change some terms after your first year. It could hike up the annual fee, for one.
The Credit Card Accountability Responsibility and Disclosure (CARD) Act lays out that a card issuer has to send you advance notice of such significant changes, which could also include a hike in late payment fees or cash advance fees, among other things. It will have to give you notice 45 days in advance and allow you to opt-out if you don’t accept the changes. If you do choose to opt-out, the card issuer is free to close your account.
There are other changes, such as raising your minimum payment, for which the issuer has to give you the same advance notice but doesn’t have to give you the right to opt-out. And when it comes to closing your account, the law doesn’t even require advance notification.
You didn’t comply with card terms
One reason for card account closure that might be more in your control is whether you adhere to the terms of the card. For instance, you should be careful to make at least your minimum payment by the date your payment is due. If you repeatedly make late payments, that could be a cause for concern. And if your payment doesn’t go through, say your check bounces, and this happens more than once, your issuer might want to review your account.
If you stick to your end of the contract, you will remain in the card issuer’s good graces and not give it cause to close your account.
Your circumstances changed
Another reason why an issuer might close your account is if your income declines, maybe due to a job loss. The card issuer might also discontinue a card, in which case all those who hold that particular card will be impacted. In this case, the issuer could decide to switch you over to a similar card.
Adverse impact of account closures
There could be other credit fallouts from an account closure, which could impact your credit score. For one, the total amount of credit available to you would decline. Consequently, it would increase your credit utilization if you are spending the same amounts but drawing on a smaller total credit line.
If the account that was closed goes back many years, the closure would also impact the length of your credit history, which also plays a role in your credit score. However, if that account was in good standing at the time it was closed, it will continue to factor into your credit report for 10 years and positively impact your credit history.
That’s why you should make use of your card at least occasionally so that it remains active. If the issuer decides to close a card, and you want to hold on to it, you could try talking to its customer service to see if you can salvage the situation.
What to do if your card is closed
In case your account is closed, you do have the right, bestowed by the Equal Credit Opportunity Act, to know why it was closed except when the account was closed for being dormant or because you did not make the agreed payments.
And keep in mind that you do have to pay off any outstanding balances even though the card is closed.
The bottom line