Once you’ve obtained a credit card, you may think it’s yours forever. But whether you’re using it regularly or keeping it stashed away as a “security blanket” in case of emergency, it’s important to know that creditors reserve the right to close your account, often without warning (and, they’re under no obligation to provide one). Here are some of the most common reasons why a creditor may decide to close your account.
3 Reasons a Creditor May Close Your Account
Delinquency
In other words, you're not paying your credit card bill. It probably comes as no surprise that this is the most common reason why a creditor may close your account. You haven’t upheld your end of the bargain—making payments—so they don’t feel any need to keep your account open. (Of course, just because they closed your account doesn’t mean they’ll stop trying to collect the money you owe them.) Also unsurprisingly, a closed account due to delinquency is going to really hurt your credit score.
To avoid account closure due to delinquency, you’ll have to make regular payments on time, even if it's just the minimum payment. Creditors have been known to close an account just because a customer was consistently late making their payments. If it's simply due to a timing issue, such as all your bills being due around the same time each month leaving you strapped for cash, you can ask your creditor to move your due date; they’ll usually oblige.
Inactivity
You might wonder why a credit card company would care whether or not you use your card. The truth is credit card companies can only extend credit to a limited number of customers, and they want customers who will use it regularly so they can collect transaction fees and interest charges. So, if your card is sitting around unused, the creditor is not making money; in fact, you could be costing them money because they could be giving your credit to someone else who would actually use it. So, the creditor may opt to do just that—cancel your credit card and extend it to someone else.
When this happens, you’ll see “account closed by creditor” on your credit report. The good news is that unlike delinquency closures, this notation isn’t picked up in the credit scoring calculation and won’t affect your score just by being there. The bad news is that losing an account can impact other aspects of your credit score, such as:
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Your credit utilization ratio, which is the how much of your available credit you are using. For example, say you have a total of $10,000 in credit and a total balance of $3,000; your credit utilization rate would be 30 per cent. Now, let's say a creditor decides to cancel a credit card that has $4,000 of available credit. That means your available credit went from $10,000 to $6,000, but you still have a $3,000 balance—that would bring your credit utilization rate up to 50 per cent.
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Length of credit history, which creditors use to predict your future financial behaviour. If the idle card that gets cancelled happened to be one of your oldest, this will affect the average age of your credit history and can lower your score.
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Diversity of credit, which is the different types of credit on your report. If the credit card that was cancelled was the only credit card you had, having that account closed reduces the diversity of your credit, which can reduce your score.
The length of time you can keep a card inactive before the creditor decides to close it varies from company to company, so you may want to inquire with your credit card company about their policies. Another way to avoid having a card closed due to inactivity is to use it every few months, and pay it off immediately. You could also consider setting up a recurring payment on it, such as car insurance, which you then pay off every month.
Red Flags on Your Credit Report
Meet Bob. He’s been laid off from his job and is relying on credit cards to get by—not a good strategy, but it happens. Bob’s maxed out two credit cards, but he still has his trusty Scotiabank Visa! So he heads to the grocery store, stocks up on food and household items, and swipes his card at the register. Denied. He swipes again; denied again. What’s going on, he wonders. This card is in good standing!
Unfortunately for Bob, creditors monitor credit reports and look for red flags. In Bob’s case, Scotiabank noticed that he’d maxed out two cards within a span of just two months, and hadn’t made payments during this time. This indicated to the creditor that Bob was going through hard times, and rather than risk him using their card next and not being able to pay it back, they decided to pull the plug on Bob. Sometimes creditors will just lower the limit to reduce the risk, while other times they’ll just close the account completely.
To avoid account closure due to red flags, you need to be sure you make at least the minimum payments on each account every single month, no exceptions. You can't assume that you can stop making payments on one card and still keep another; it doesn’t always work out that way.
Having an account closed can be a startling experience when you have no warning—and often an embarrassing one depending on where you are and with whom when it’s declined, like a crowded supermarket, or worse, a client lunch! You should call your creditor following the closure to get confirmation on why it was closed and to make sure it wasn't an error. If it was due to inactivity or false red flags, they may decide to reinstate it. But if it was due to delinquency, chances are it's gone for good. If you're in debt denial or you don't know exactly where you stand when it comes to your debt, you can take our quick debt check-up quiz.
No matter what financial difficulties you are facing, a certified credit counsellor at Credit Canada can help by reviewing your situation and options with you. Contact us today! Our counselling sessions are free, non-judgmental and confidential.
