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I just saw this article called “My credit card was cancelled” on the money section of CNN.com. In it a reader asks a question about why her credit card company closed her account and how it would affect her credit score. The answer was a new one to me…
Having a credit card with history benefits your credit score
I have always heard that having a long-running relationship with a credit card company is a good thing. For that reason we have kept our two oldest credit cards open while closing all the others. We also occasionally purchase something on them and quickly pay it off - supposedly activity on them is better than no activity.
These are the things I have heard in the past, so that is why we have done them. I honestly don’t care too much about my credit rating since I have adopted a bit of Dave Ramsey’s philosophy. The only thing I intend to go into debt for is real estate and the .25% rate difference that we may get isn’t much of a concern for me, since I am planning to have it paid off in less than half the time anyway.
Don’t get me wrong, I am all about saving money by being diligent, but there are only so many hoops that I am going to jump through to keep the best possible credit score. I mean if you have ever read (the often-changing) list of dos and don’ts to have a good credit score it can make you feel like you are walking on a tightrope trying to appease Experian, Transunion, and the other one.
We just recently paid off our last credit card. We have been working the last three years to pay off over $30,000 of consumer debts. I love the feeling of not having credit card bills to pay each month and I am not about to put a balance back on my credit card to get me an extra 5 points on my credit score. But, that’s just me, if you are into that sort of thing, by all means have at it! 
Anyway, back to the article…
The answer that was given in response to the reader question was surprising to me…
“Credit-card companies lose money on dormant accounts, and as they feel the economic pinch, they’re more apt to close them. Unfortunately, as you suspected, closing your oldest card can lower your credit score. The length of time your accounts have been open is the third most heavily weighed factor in your FICO score (after timeliness of payments and the amount you owe). Plus, eliminating a card reduces your available credit, which could also lower your score.”
I didn’t know that they lose money on inactive accounts. I guess it is good to know. They went on to explain that…
“If you have a lot of other cards and a credit score of 720 or higher, one closure won’t have much effect on your score. But if you have a slim credit history and few cards, it’s wise to make sure your oldest accounts stay active. So use your card at least once every three or four months.”
What about you? Do you work on keeping a good credit score?
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While the mortgage and financial crisis seems to be old news, Forbes points out that the next industry to have a crisis of it’s own is the credit card industry.
They said, “Capital One disclosed rising delinquencies and loan losses for the month of November because of unemployment and the weakening economy.”
This isn’t really surprising if you think about it, but we can be sure that the credit card companies will be changing some policies as they adapt. Apparently Bank of America, Citi, and AMEX have already begun to raise rates and minimize credit limits for many cardholders.
What you can do to keep yourself out of trouble with your credit card company
The Forbes article has a few suggestions…
- Experts advise reading the terms and conditions on your account statement every month, so you can pick up on any unexpected changes your card company slips into the fine print.
- Make sure you don’t use too much of your credit limit. Use no more than 30% to 40% of your available credit on one card and across all your cards. Going past that threshold is a trigger lenders to change terms.
A few of my own suggestions…
- Work extra hard to pay them off! I can’t tell you how wonderful it feels to not have to deal with credit card companies any more. I think this whole financial mess the U.S. has gotten in is really going to push a lot of people to want to get out of debt and stay out!
- If you have good credit, you will have some power to negotiate with the credit card companies. I am sure it may not be as easy to negotiate a lower rate than it used to be, but they still do not want to lose your business. It is worth a shot.
- Organize your bills so that you can make sure you pay your bills on time! With their revenues down, they are going to take full advantage of anyone who doesn’t play by their rules.
Watch out - they can raise your rates any time they want to
It is surprising, but it is still legal. You can be a customer who never paid a bill late, is using 40% of your credit limit, and did everything right, but see your interest rate sky-rocket overnight. I just watched a video yesterday about a guy who did just that and had his rate go from 7% to 30% overnight - for no apparent reason. And he can do nothing but suck it up and take it.
The good news is that there have been so many complaints over the last few years that the government has stepped in and is creating new rules to prevent credit card companies from doing this. Read more below…
While banks can raise rates for future balances, the new rules, which aren’t expected to take effect until 2010, won’t allow them in most circumstance to increase the rates consumers pay on existing balances.
The rules also prohibit banks from raising rates when a customer falls behind on other bills, say a utility payment, not related to their card account.
Card companies will have to give consumers 45 days notice of any interest rate changes, up from the 15-day notice period currently in force, and give them more time to make payments.
Have you had any nightmare experiences with credit card companies?
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