I have written in several recent posts about credit card issuers changing the terms or closing customer credit accounts. Credit card issuers are hearing a lot of complaints about the practice of closing credit accounts without warning, and the complaints are intensifying as customers learn that losing an open line of credit is actually hurting their credit score.

Banks and credit card issuers are focusing on closing accounts that are inactive. People carrying no balance and who have not even used their credit card to make purchases in several months are at the greatest risk of having their accounts closed. For credit issuers, every customer is a potential liability, and in a poor economy the risk of customers building balances that they will be unable to repay becomes more substantial.

Customers not using their credit cards might be able to survive without being able to access the line of credit, but losing those available funds can have a serious negative impact on your credit score. A spokesman for Fair Isaac said recently that 30% of a consumer’s credit score is based on their credit utilization ratio. This number is a reflection of how much of your available credit has been used.

For instance, if you have two open lines of credit with a total available balance of $5000 each and you’ve used $2500 of that credit, then your Credit Utilization Ratio is 25% ($2500 out of $10,000). If a credit card company closes one of those 2 lines of credit and you still have that $2500 balance, your ratio jumps to 50% ($2500 out of $5000). How bad can a scenario like this be for your credit? Someone with a credit score in the low 700’s with a credit utilization ratio jumping from 35% to 75% could see their credit score drop instantly by up to 100 points.

Your credit score will reflect that it was the issuer of the credit that closed the account, but this will not change the impact on your score. Longevity, or having open accounts with the same issuer for many years, can offset some of the negative impact, but certainly not all of it. A lower credit score makes it difficult to take advantage of low interest rates or to get credit at all if you need it.

There is no secret way to avoid this-credit issuers are in trouble and are cutting back where ever they can. Your best bet is to use the card you have at least occasionally, and it won’t hurt to carry a small balance. Paying a little interest each month while still making timely payments could make you a more attractive customer for credit card companies.

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Tags: credit, credit card, credit score

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