Credit Card Companies Are Now Canceling Cards Due to Not Enough Use!
Charging too much on your credit cards is a good way to get into financial trouble. So, in this economic climate, it’s best to keep those cards in your wallet, right According to an article in MSN Money, not necessarily so.
Banks are apparently taking a hard look at customers who don’t use their credit cards — or who don’t use them anough — and simply canceling those cards. The banks reason that closing rarely-used accounts lowers their risk profile, because getting rid of unused accounts limits the bank’s liabilities (potential available credit) compared to the bank’s assets. Also, simply maintaining those accounts is an expense. But closing an account also means that the customer’s available credit is reduced. You may not need that credit, but your credit score can take a big hit when an account is closed.
Credit scores are based on a complex formula. According to Craig Watts, spokesperson for Fair, Isaac, about 30% of your score is based on your credit utilization ratio — the amount of your debt in relation to the amount of your available credit. Watts says a person with a solid credit score of 720, for example, whose utilization ratio increases from 35% to 75% after a bank closes an account is likely to see her credit score plummet by several dozen points. The resulting score would be far less than the 760 (or higher) consumers now need to get the best rates from lenders. (See Mark Anderson’s January 6 post.)
The ironic conclusion is that credit may become more expensive for the consumer who thought she was being responsible by not using her credit card!