3 Reasons Your Credit Card Issuer Could Close Your Account
The closing of your credit card account means several things and none of them sounds good. Credit card accounts are usually closed if you default, if you stop using your credit or if there’s changes in creditors’ policy or the holder’s credit score. The first reason is the worst since defaulting means you’ve damaged your credit score to pretty serious levels.
3 Reasons Credit Card Accounts are Closed
There are only three likely reasons that can lead to a credit card account getting closed.
Default is the most common reason for credit card accounts getting shut down. Your credit card account defaults when you’re unable to pay the outstanding credit debt for 180 days. After this period, creditors usually close the account, report your default to credit bureaus like Experian and sell the debt to debt-collection agencies at far less than its face value. Default damages credit score to the extent that in most cases, you’d have to start building credit from scratch.
Lack of Use
You can also get your credit account shut if you stop using your credit card even if you have no credit card debt. The reason is that creditors make money from interchange fees when you use your credit card. Not using it can make your creditor question the rationale for your credit card account that is not creating any monetary benefit for them and that can lead to a closure.
Change in Credit Score or Terms
The third reason is the hardest to quantify since it’s dependent on so many variables. Your credit card could simply be shut down on creditor’s discretion if there’s a sudden drop in your credit score and creditors’ perception of your line of credit becomes unfavorable. Another reason it could get closed is if there’s a change in the creditor’s policy which requires it to shut down specific credit accounts.
What Happens When Your Credit Card Account is Closed?
Different things can happen depending on the reason why your credit account is shut down. For instance, if your account was closed due to default, you can expect the debt collection agencies to hound you (legally) for debt recovery. This can lead to court cases and consequently, garnishment of your wages or levy on your bank account.
On the other hand, your credit score would hit rock-bottom and you’d have to start building credit from scratch, most likely with a secured credit card. However, if you had no credit card debt and your account was shut because of lack of use, you’d lose nothing and your positives of handling credit would be reflected for the next 10 years in your credit report.
How to Prevent Your Credit Card Account from Getting Closed
Getting your credit account to not get closed is actually surprisingly simple. All you have to do is follow the best credit practices and you should be safe.
Keep Credit Utilization Below or at 30%
I’ve covered credit utilization elsewhere as well and discussed how you need to keep your credit utilization below or at 30%. While you can definitely exceed this limit, doing so would hurt your score and make creditors uncomfortable about your liberal use of credit.
Keep Debt to Equity Ratio Below or at 35%
Your overall debt should not exceed 35% of your after-tax income or this would make it difficult for you to get loans, mortgages and credit cards and if and when you do, you’d be acquiring them at substantially higher interest rates.
While exceeding this limit does not mean your credit account will be shut down but it’s better to not give your creditors any reason to exercise their discretion against you.
Pay Your Credit Debt on Time
Above all, always pay your credit card bills on time. Delaying your credit bills pay-outs is never a good idea. It will be bad for your credit score as well as incur late fees and higher interest rates on your debt, eventually making it harder and harder for you to pay it back, exposing you to the risk of default.
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