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My Credit Card Company Is Canceling my Account. What Can I Do?

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Q: Got a letter that one of my credit cards will be closed due to inactivity. I shouldn’t let that happen, right?

A: There are a lot of reasons you may not want to close a credit card, even if you’re not using it very often. But before we get into that, let’s talk about if and how you can stop a credit card company from closing your account.

What You Can Do If Your Bank Wants to Close Your Card

There are several reasons a creditor may want to close your card account — inactivity, fraud and default, to name a few — and every financial institution will have its own policies for handling those situations. If your bank sent you a notice about the account closure, check it for information on how to stop it. For example, it may say that using the card before a certain date will prevent it from being closed due to inactivity. Beyond that, call your bank for answers.

“Certainly people should contact the card issuer if they object to the account being closed,” said Nessa Feddis, senior vice president & deputy chief counsel for the American Bankers Association. “The bank may keep it open if it is appropriate.”

In the end, it’s up to the bank, and keeping your account active and in good standing can help you avoid an unwanted closure.

“There is no requirement to provide advance notice,” Feddis said. “Otherwise, for example, someone who no longer has the ability to repay would be tempted to use the entire line before the account was closed and then be unable to repay.”

How Closing a Credit Card Can Affect Your Credit

There are two main ways closing a credit card can hurt your credit. First, closing a credit card can hurt your credit utilization rate, and second, it could hurt your credit age. (You can read more here about how your credit score is calculated.)

Here’s an example of how it could affect your credit utilization: Say you have two credit cards, each with a $1,000 limit (meaning your overall available credit is $2,000). You only spend about $500 on one of the cards and pay off the balance each month, but you never use the other one. You want to use as little of your available credit as possible, both on individual cards and as a whole, but your overall credit utilization is most important for your credit score.

With both cards open and that $500 balance, you have a credit utilization rate of 25%. That’s pretty good — credit scoring companies recommend you keep your overall credit utilization rate below 30% or, ideally, below 10%. But because you’re not using that other card, the issuer decides to close it. You’re still using about $500 of that other credit limit every month, but now your overall available credit is only $1,000. That turns out to be a 50% credit utilization rate, and the increase from a 25% utilization rate to a 50% utilization rate can hurt your credit score.

The other thing to think about is your credit age: It’s calculated by averaging the age of your open accounts. The older your average credit age is, the better it is for your credit score. So if your credit card is on the older side of your credit history, it’s helping keep your average credit age up (because it can go down every time you open a new account). Take that old credit card out of the equation, and you may see your credit card suffer until enough time has passed for your active accounts to bring up the average age of your credit accounts.

Of course, there are good reasons for closing a credit card. Perhaps you really dislike working with the issuer, you’ve run into too much trouble with credit card spending or the card carries an annual fee that’s not worth it (if so, see if you can get it waived). Whatever you decide, it’s important to know how it will affect you. You can see how your credit cards and other accounts factor into your credit scores by getting your free credit report summary, updated every 14 days, on Credit.com.

Image: Minerva Studio

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