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.

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I Closed an Account. When Will It Disappear From My Credit Report?

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It’s a commonly taught tenet of credit: Closing an account could wind up hurting your score. And closing credit cards can be particularly problematic — primarily because doing so can skew your credit utilization rate (how much debt you’re carrying versus your total available credit limits) and possibly affect the age of your credit report.

Of course, for folks with a lot of debt or a propensity to overspend, the decision to close an account can be a no-brainer.

And, even outside of money woes, there may be times when you just want go ahead and get rid of a line of credit. (See: credit cards with an annual fee that’s no longer worth paying.)

But will a closed account continue to affect your credit score? One commenter recently expressed some concern over the subject at hand:

I have an old Best Buy acct on my file. It is closed [and] I was late 3 times many years ago. Is it a closed acct used to calculate the age when determining my score? If, not I want to request the account to be removed. It was closed Aug 01, 2008. I am afraid if I request it to be removed my score will go down. But I thought the credit company is supposed to remove old accounts 7 to 10 years after. Please advise. Thanks.

Here’s the deal: Closing a credit card account can wind up affecting your credit utilization rate (and, therefore, your credit score) right away, as that credit line is essentially no longer at your disposal. But the account doesn’t just disappear entirely from your credit report.

When Do Closed Accounts Age Off? 

Accounts closed in good standing — meaning, for example, you didn’t miss any payments on them — remain on your credit report for 10 years from the date of closure. A closed account with a negative payment history, on the other hand, gets deleted 7 years from the original delinquency date of the account.

“So, the positive information is kept longer than the negative information,” Rod Griffin, Experian’s director of public education, explained in an email.

And, so long as the closed accounts appears on your credit report, it can influence your credit score in some way. For instance, the account will still be factored into the age of your credit report (also known as the length of your credit history.) And any negative information, like a few missed payments, could lower your score a bit — though, the good news here is, the impact will lessen as you get further and further away from the delinquency. (You can go here to learn more about how long specific items stay on your credit report.)

Removal by Request? 

Now, you generally can’t have a legitimate account removed from your credit report outside of these windows by request. “It will be removed automatically when the timeframes described above are reached,” Griffin said.

But, in our reader’s specific case, the account may already have been deleted. “It was closed eight years ago, meaning it was delinquent prior to that date,” Griffin said.

In this case, it’s a good idea for them to pull their credit reports to see if the account is still on their credit file (you can do this for free each year at AnnualCreditReport.com). If it is, they can dispute its appearance with the credit bureau in question. (You can go here to learn how to dispute errors on your credit report.)

Remember, if an old account is mussing up your credit, you may be able to raise your score by paying down any high credit card balances, asking for a credit limit increase or consolidating revolving credit with a personal loan. And you can build good credit in the long-term by making all payments on time, keeping debt levels low and adding a mix of new credit accounts only as your score and wallet can handle them. (You can track your progress by viewing two of your credit scores for free each month on Credit.com.)

[Offer: If you need help fixing errors on your credit report, Lexington Law could help you meet your goals. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

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Image: Jacob Ammentorp Lund

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