How a closed card account affects your credit—and what to do about it

You just found out the credit card company closed your account. Now what?

Dear Beth,

I used to carry a high credit card balance, though I never missed any payments. A couple of years ago, I paid it all off. Then I ceremoniously cut up my card to remove the temptation. Recently, I checked my credit reports and noticed that the card account was listed as “closed by credit grantor,” meaning the company had shut it down. I had never intended to close the account. (With no annual fee, why bother?) Is this bad for my credit? Am I in trouble? What should I do?

—Vance Eckford, Merced, Calif.

Take a deep breath. You’re not in trouble. In fact, your situation is fairly common. A recent survey found that half the time credit card companies close their cardholders’ accounts, it’s for inactivity—which is what happened in your case. That said, the closure could affect your credit going forward. Here’s what you need to know, and how you can prevent surprise account closures in the future.

How a closed card account affects your credit

First, there’s good news when a card is closed for inactivity. “A lender closing your credit card account is not viewed as a negative indicator,” said Can Arkali, senior director of scores and predictive analytics at the credit-tracking agency FICO. The bad news? It may look like you’re suddenly borrowing closer to your max, which can have a negative effect on your credit score.

Here’s why: When your credit card account closes, you have less money available to borrow. This could bump up what’s known as your credit utilization ratio, the percentage that indicates how much of your available credit you are using. And that’s not great.

“Increasing your credit card utilization may lower your FICO score,” Arkali said.

(This is the second-most important factor in determining your credit score, after payment history, so it matters.) With credit utilization ratio, the lower the percentage, the better; credit gurus suggest keeping it no higher than 20%.

For example, say you owe $2,000 total on four cards with credit limits of $2,000 each—or $8,000 in total credit. Then, one card gets closed because you stopped using it. Although the amount you owe stays the same—$2,000—your total available credit has shrunk from $8,000 to $6,000. Consequently, your credit utilization ratio has jumped from 25% to 33%. One possible solution: Ask to increase the credit limit on an active card to make up the difference, especially if you’ve been a responsible customer. (Note that this might require a new hard inquiry—a credit check ordered by a potential lender—that could ding your score temporarily, perhaps five to 10 points for a few months.)

How to make sure your card accounts stay open

To avoid any negative effects on your credit, you need a game plan to prevent your credit card account from shutting down without your knowledge.

  • Use it, a little. The surest way to avoid having a card deactivated is to charge something on it. Use the card for a small monthly purchase, like your Spotify subscription, and make sure to pay it off automatically every month. To be clear, do this only when you can routinely pay off the charge in full.
  • Keep your billing address updated. Although card issuers aren’t obligated to warn you that your account will be closed, they may choose to. So keep your contact information up to date. I know one college grad who had a credit card in school, but then lost track of it in a jumble of address changes, new jobs, and new bank relationships. When she rediscovered the card years later, it was too late: The bank had closed the account permanently.
  • Check your credit reports. Card companies reserve the right to close accounts whenever they want to, whether it’s because you missed payments or because they decided to stop offering a given card (for reasons that have nothing to do with you). And as you discovered, it can take months—if you don’t regularly use a card—to learn that your account was closed. By getting free reports at annualcreditreport.com from each of the three major credit bureaus, you can check to make sure all your accounts are active and accurate. (Credit reports are notorious for containing mistakes, so it’s good to request and check them once a year for that reason, too.)

Talking about money can leave you tongue-tied. My weekly newsletter is full of financial conversation starters.

But what if you just want to reopen that closed card account?

If you discover that your account has been closed, it’s worth calling the number on the back of the actual card to learn your options. Some companies reinstate closed accounts if you simply ask, although you may have a window of just a few months after your card is closed to do so. And as with a credit limit increase, a request to reinstate usually involves a hard credit pull that could nick your score slightly and for just a few months. If you do reopen the account, make sure your credit reports retain the original date you opened it, so you can maintain the full length of credit history on the card. That’s because the length of time you have a credit card also affects your credit score. Generally speaking, the longer you have a card with a clean payment record, the better your score will be.

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