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How To Make Sure Your Credit Card Does Not Get Locked

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Can a Credit Card Issuer Really Lock Down and Close Your Card Account For No Fault of Yours?

Imagine if you will, this very embarrassing credit card situation: you do your shopping at a store or eat at a restaurant and then grandly produce your credit card to pay for it. The cashier (or waiter), though, bluntly tells you that it’s been declined. You hurriedly call the customer service number on the back of the card; quite sure that it’s all a big misunderstanding. You learn that it isn’t – the bank just summarily canceled your credit card and closed your account. They sometimes do this even to credit card users who have never been late or skipped a payment. Surely, this can’t be legal, you wonder.

Not only is this legal, it happens to credit card users all the time. The consumer protections offered by the Credit Card Act of 2009 only go to protecting you against unannounced interest rate increases and fees. It does nothing about credit card issuers who yank cards out their customers’ hands or summarily reduce their credit lines.

Why do the credit card companies want to do this?

Credit card issuers usually only close credit card accounts when the cardholder appears irresponsible – if he is irregular with his payments, goes over his credit limit or files for bankruptcy. These are legitimate reasons and even consumers usually agree that these are just reasons.

The credit card issuers are allowed to pull the plug for other, less obvious reasons too. They use software to constantly study each credit card holder’s spending and payment pattern. If something about a consumer makes them feel that there is a risk that the cardholder will soon be unable to pay his credit card bills, they bail on him.

They don’t simply look at the spending and payment patterns on the card they’ve issued, either. Credit card issuers share information with one another.  If a credit card holder has a questionable payment or spending record with another card issuer or if his credit score takes a sudden dip, that’s all it takes.

On the Chase Freedom credit card, the card agreement explicitly states that they can actually consider a cardholder’s account to be in default if they merely believe that he may be unable to pay his debts on time. They can do this preemptively.

In practice, the most common reason a card issuer may pull a consumer’s card is if he doesn’t spend enough on it. They don’t wish to lock their resources up with a consumer who doesn’t spend. If they gave it to another consumer who did spend a lot and racked up expensive interest charges, it would be more profitable to them.

The law doesn’t mind this

These kinds of actions naturally outrage consumers but no one has been able to successfully challenge the credit card companies for such unprovoked card closures. A Philadelphia consumer who sued Citizens Bank in 2012, for instance, had his lawsuit dismissed. The bank revealed in the case that they tracked each consumer’s monthly payments as compared to what he owed, and how much of his credit limit he spent.

Card closures may result in credit score problems

If a card closure is for reasons of a poor record paying your bills, it could certainly hurt your credit score. A closure for other reasons such as an unwillingness to spend much never directly results in credit score damage. Indirect credit score damage, though, is unavoidable.

When a consumer’s card is closed, his credit utilization ratio – the amount of credit he has outstanding as compared to the entire amount he’s able to borrow at any given time – suddenly jumps up. Since the FICO score considers a high utilization ratio to be a sign of instability, a credit card closure could damage your credit score.

What you can do

There is nothing much you can do to get back a credit card that’s been closed. To repair a credit score that’s been damaged this way, you can try to pay off other loans that you may have. This can help bring your credit utilization ratio back down.

What you can do is to make sure that you don’t get your credit card pulled in the first place. Try to make your payments on time. You should also use your credit card for at least some small purchases each month to make sure that the card company doesn’t think your card is inactive.

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