Using most of your credit limit is asking for trouble

Dear Liz: I have four credit cards with balances that are $800 to $1,200 below the cards’ credit limits. The lowest limit is $1,500 and the highest is $4,000.

Earlier this year I received a notice that my interest rate on one was jumping to 31.99%. Then I got a letter from the same bank saying that because I was so close to my limit, it was closing my credit card. I was $950 below my limit of $4,000, plus I had not used this card in four months.

Because I feel this is an unfair move, I want to report this bank and have it documented that it closed my account. I’m not sure where to go to do this. Any suggestions? By the way, how does this closure affect my credit score?

Answer: Using most of your available credit is a bad, bad thing.

It’s always been bad for your credit scores, which tend to dive the closer you get to your limits. But these days it’s also bad for your relationship with your credit card issuers. In the past, they may have been willing to overlook maxed-out cards. Now they’re fleeing risk and looking for any reason to dump customers they think are more likely to default.

The fact that you haven’t missed a payment so far isn’t actually relevant here. People who use most of their available credit are statistically more likely to default. That’s why it’s prudent to use as little of your credit as possible — less than 30% of each limit is good; less than 10% is better. (That’s true even if you pay off your balances in full because what gets reported to the credit bureaus, and used to calculate your credit scores, is typically the balance from your last credit card statement.)

It’s impossible to predict the effect of this account closure on your credit score, but typically it isn’t good. Closures reduce your available credit, making your existing debt loom larger in credit-scoring formulas.

You can complain to the issuing bank’s regulator if you’d like, although you’ll need to do some research to find the appropriate agency. Large banks are often regulated by the Federal Reserve or the Office of the Comptroller of the Currency (the OCC regulates banks with “National” or the initials N.A. in their names). The Office of Thrift Supervision oversees thrifts, savings and loan associations and federally chartered savings banks, and the National Credit Union Assn. supervises credit unions.

Once you’ve fired off your complaint, though, focus your energy on repaying your debt and using your cards only as a convenience rather than as a way to live beyond your means. Carrying credit card debt has never been prudent, but these days it can be particularly hazardous to your financial health.