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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.

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15 Comments

1

How often should a person use their credit card. To establish and rebuild my credit, I plan on using mine once a month and paying the balance off in full each month and keeping the usage at 30% or below. Is this a good plan?

2

It is. Using it regularly will keep your issuer from closing the account due to inactivity, while keeping charges to 30% or less of the limit will protect your scores.

3

Thank you for your response! How long does it take before I will start seeing improvements in my score?

4

Most cc issuers report every 30 days or so, so you may start seeing improvements in a month.

5

I tried to post this question to “How to cope with credit card rate hikes,” but I was unable to do so.

With the increase in credit card rates. Is it safe for anyone, including those with good credit, to even apply for a card? How does on research getting a credit card that doesn’t run the risk of increasing to these insane rates. I’m scared to apply for a unsecured card in the future because of the rate increase, although I have every intent of paying on time, above the amount and in full. From what I’ve been reading, that still hasn’t helped people, they have still had insane rate increases.

6

In your entry titled “Opening new account won’t help score” that was posted on May 4th, you said that opening and closing accounts does not help scores. I’m in the process of repairing my credit (scores in the low 500s…ick) and since I was approved and recieved the card this week, my score has gone up 20 points on my equifax report.

How is this possible? If my score went up on my equifax report, will it increase on my fico report, which I remember from another post is the score that is the mort important when it comes to home loans. I have not used the card yet, but I’m assuming my score increased because I was able get a new line of credit.

7

Looks like I need to tweak that headline. It was meant to refer to the questioner’s specific situation (he asking if opening a new card would “restore” the point drop from closing an old one). If you don’t have good credit, getting approved for a new account can help your score–as can plenty of others things, including the simple passage of time or paying down a credit card balance.

Your Equifax score may indeed be a FICO score. Equifax is the only bureau that sells FICOs directly to consumers. Trans Union sells them through MyFico.com, and Experian no longer sells FICOs to consumers (although it continues to sell them to lenders).

8

After February it will be harder for issuers to raise rates, although they still can. The bottom line is: don’t charge more than you can afford to pay in full every. single. month. Don’t carry a balance “just this once” or convince yourself you’ll find the money somehow to pay off the bill.

9

Thanks for this! Actually, the next day, I received an email from myfico indicating that my fico score had gone up as well by 20+ points, so that was very encouraging.

Thank you so much for your blog and books, I really feel like I’m on the road to debt recovery and am gaining so much knowledge as to how to NEVER reach this area again.

11

When paying off debts, is it bad to pay the settlement of an account vs. the full account balance?

12

Settlements with original creditors are terrible for your credit score. Read my column on debt settlement for more: http://tinyurl.com/8aa3kt

13

What they want to see is demonstrated patterns of timely payments and no delinquencies.

14

I have a debt that is around 2K that I settled for half. I’ll have it paid off in Novemeber instead of May of next year. Based on your article, that was a bad decision. I’ve paid my 2 credit card balances in full, neither of those were settled. Are settling one kind of debt worse than settling other kinds? In total, I have around 2500 in debt, minus students loans (which I know are good credit, so I don’t worry about those since I pay them). After the account I settled is paid off, I’ll have a few small debts b.t 200-300 dollars and all my debt will be clear. What damage does settling this acount have on my score?

15

You’d need to check your scores to find out, but you can bounce back from any credit goof over time. Continue to pay on time and pay down that debt and your scores will recover if they took a hit.