Credit card law didn’t cause account closure

Dear Liz: What’s up with creditors closing accounts in good standing because “the account does not have a high-enough credit limit”? My husband’s credit card, on which he has never made a late payment and which he typically pays in full monthly, has been closed for the reason stated above. I know of others this has happened to.

The ding to one’s credit rating can’t be good because the account is listed as “closed by credit” and it causes an immediate increase in the debt-to-limit ratio. This seems wrong, and it must have something to do with the credit reform. But what can we as consumers do to mitigate the damage?

Answer: Issuers actually started closing accounts and reducing people’s credit limits when the credit crunch hit in late 2007 — long before the credit card reform act that was signed into law in May 2009.

The trend accelerated as the recession led to a big spike in delinquencies. Credit card companies fled risk, and among the hardest hit were people with less-than-stellar credit. A low-limit card is typically a sign that the cardholder’s credit isn’t great, and some issuers made the decision to close many of these accounts.

A closed account can ding scores further, but the credit scoring formulas don’t care who closed the account. You don’t lose more points, in other words, if a creditor shuts down the account rather than you closing the card voluntarily.

Your husband’s best option at this point may be to check with a local credit union to see if it would issue him a credit card. Credit unions are often more flexible about credit scores than other issuers.

If he can’t get another regular credit card, another option is to apply for a secured credit card that offers a line of credit equal to the deposit he makes at an issuing bank. He should look for a card that charges no upfront fees, has a relatively low annual fee (under $100) and reports to all three credit bureaus. Sites including CreditCards.com, CardRatings.com and Card Hub list such offers.

Once he has the card, he should use less than 30% of its credit limit and pay it off in full each month. Over time, that should help him improve his scores enough to get a regular card.