Credit-Card Companies Shut Down Consumers' Lines

LAST WEEK JEFF Larson got a letter from Capital One (COF) saying it closed his credit card due to inactivity.

Larson, a mechanical engineer in Portland, Ore., opened the account, which had a $7,000 credit limit, nearly eight years ago and hadn't used it in three. He had kept the card in part because it was his oldest account, which helped boost his credit score. Larson now plans to find a new card. (A Capital One spokeswoman said the company has notified some customers whose accounts had seen zero activity over the last three years, but added that it's not a new strategy.)

Issuers closing customers' inactive cards isn't uncommon. But card holders may notice more cutoffs these days. As credit-card delinquencies rise, closing inactive accounts helps companies reduce their exposure to risky credit holders. And delinquencies are a growing problem: In February, the rate was 4.5%, about 16% higher than February 2007 — and the highest it's been since March 2004, according to Moody's (MCO). (Delinquency refers to credit-card payments that are at least one day late.)

Even for people like Larson, who carry little to no outstanding credit-card balances but keep an extra card in case of emergency, an involuntary closure could not only take away a standby line of credit, but negatively affect their credit score as well. To prevent that from happening, consumers need to be proactive about managing their credit, says Linda Sherry, spokeswoman for Consumer Action, a consumer rights organization in San Francisco.

Mitigating risk

Issuers close credit lines for several reasons. One is if the card holder is deemed unprofitable, which is essentially the case when the card goes unused, says John Ulzheimer, president of consumer education for Credit.com. "Even if you don't use your credit card, you cost them money by being in their system," says Ulzheimer.

Companies might be increasing their closures now in the wake of new rules proposed by bank regulators that would impose greater restrictions on the credit-card industry. If a card holder is delinquent on an account, the issuer may close it to mitigate further risk, Ulzheimer says, or increase the interest rate. (Under the proposed regulations, credit-card companies would have to give consumers more time to make payments before they're considered overdue, and they'd be limited in raising the interest rates on outstanding balances.)

How it hurts

According to Fair Isaac (FIC), the company that developed FICO, the credit risk score used by the majority of lenders, scores do not factor in whether the card was closed by the consumer or issuer. But there's a calculation within credit scores called revolving utilization that can impact your overall credit score, says Ulzheimer. Revolving utilization (or debt-to-available-credit ratio) is a measurement that calculates the ratio of balances to credit limits. It's almost as important as making payments on time, says Ulzheimer.