Actions taken by credit card companies have shocked consumers and lawmakers alike for years. They have a history of raising interest rates, adding high fees and penalties, and even participating in financial profiling.
However, some consumers with great payment histories have found that after paying off their cards, they have suffered lowered limits, interest hikes, or account closures, which can adversely affect a credit score. Now, more questions than ever are arising regarding credit card issuer activity.
Stories of Common Practices
On the site FiveCentNickel.com, a man posted a short comment about his wife’s experience of having her American Express credit limit reduced from $10,000 to $500. Before her reduction was imposed, her card had not been used in about six months. Another user on the site noted that his American Express card limit dropped from $25,000 to $500 after holding very low balances periodically that were always paid off before ever accruing interest.
Then there’s the story of Kevin who was very disturbed after learning that his card had been closed after he had paid off his balance and left his account inactive. When he called his issuer, WAMU, for an explanation, he learned that his account was a “security risk” because it hadn’t been used in over a year. Since the account was the oldest on his credit file and carried a decent limit, his score dropped.
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You’ve probably also heard the reports of credit card issuers charging fees to customers for low activity to their accounts. For instance, Citigroup supposedly has started charging annual fees to cardholders who don’t put more than around $2,400 on their cards each year.
This adjustment in the world of banking sends an interesting message to card holders: Staying out of debt results in penalties.
Financial Crisis, New Credit Card Law Play Roles
There are a couple reasons floating around that credit card companies are making adjustments to credit cards. One is the financial crisis of 2008.
Tanisha Warner, communications manager at Money Management Intl., a non-profit credit counseling organization in Roanoke, Va., said everyone felt the pinch after last year’s market crash.
As a result, “the credit card companies had to do things to stay afloat,” she said. These things included lowering limits and closing accounts, even for those customers who had been in good standing.
Also, Warner noted the Credit Card Bill of Rights has made a difference.
“Lenders are going up on their interest rates and some are cutting limits because of a tightening up in the lending industry,” she said. “They’re resetting their standards.”
But another reason that card adjustments are made has everything to do with a person’s account.
In an email response from Gail Hurdis, a spokeswoman from Chase Card Services, a division of JPMorgan Chase & Co., she explained that the company “evaluates whether our customers’ credit lines are appropriate for them and will make adjustments accordingly.” After reviewing the accounts, “we may lower lines for customers who are showing signs of increased risk or inactivity.”
Warner said companies often take their creditworthiness check one step further by looking at your overall credit activity to determine your level of risk.
“If you have negative activity on another credit account, they will view you as more of a risk and make adjustments accordingly to your limit or interest rates,” she said. “They look at your activities across the board to make their decisions.”
How to Combat Credit Card Companies
According to a recent USA Today article, you have a couple of options available to you to help you combat unfair practices by credit card companies:
- Call the company: Your first action in a situation where a company has seemingly penalized you for paying off your debt is to call and complain. Warner agrees with this idea. “Call the lender and explain that you’ve been a good customer, explain that you want your account to remain the same and that you would prefer not to go somewhere else,” she said.
- Walk away: If you find no refuge in speaking with your credit card issuer, you can always walk away. Warner calls this an “opt out,” which allows you to pay off your debt at the original term and close your account (if it hasn’t already been closed by the grantor). However, keep in mind that your credit score is determined in part by your credit utilization ratio, which references the amount of credit you have outstanding in relation to your total available credit. If you close your account, you could reduce your total available credit, which in turn could increase your ratio above the recommended 30 percent and as a result, lower your credit score.
Keeping Your Card and Credit Score in Good Standing
Warner said if your card is in good standing and you don’t want to lose the account, you can simply use your credit card from time to time.
“Use your card monthly and pay the balance before interest accrues,” she said. “This, along with maintaining a mix of credit, including auto loans and mortgage loans, can do wonders for your credit score.”
Also, you can consider opening a credit card account that imposes no annual fees, particularly from credit unions since they also offer lower interest rates.
As for fluctuating rates and adjustments from banks, with the exception of the restrictions that will take place according to the Credit Card Bill of Rights, Warner said you can expect to see adjustments as long as you have a credit card. “The banking industry changes all the time; the Federal Reserve adjusts interest rates regularly” she said. “As a result, you may have to share the brunt of everything that can happen on the lending side of things.
More information on credit card debt.