The first wave of new credit card regulations under the CARD Act took effect recently, but consumers have been feeling the effects for months. Most card issuers made changes to customer accounts in advance of the new provisions, which, among other things, require lenders to give cardholders at least 45 days’ notice of new terms and conditions. Many Americans saw their credit lines and interest rates change as lenders rebalanced their portfolios before the new laws phase in.
The spirit of the law intended to keep consumers informed about changes to their credit card accounts. However, some banks have interpreted these regulations to justify cutting loose loyal, creditworthy customers for the sake of arbitrary accounting efficiency. In a shocking trend, some lenders have started canceling cards completely, then mailing out closure notices. Some consumers have recently discovered this in the most shocking way possible: by being declined for transactions while swiping their cards!
Amazingly, this policy is completely acceptable under the CARD Act. “Account closure” is not the same as “account changes,” meaning that banks are under no obligation to warn you that your card won’t work anymore. The Wall Street Journal, The New York Times, and ABC News have all documented cases where otherwise loyal customers found themselves stuck at cash register, airports, or hotels with no method of payment. Unexpected account closure does much more than cause a scene at a retail store. It can cause a chain reaction of events, including:
- A drop in your credit score due to a spike in your “credit utilization” – the percentage of your credit limit in use across all of your accounts.
- Increases in insurance premiums triggered by your lower credit score.
- Fees and penalties caused by failed automatic transactions on a closed credit card.
I’m outraged, and I hope you are, too. Here’s how you can take action:
- Monitor your credit. Every American can review credit reports once each year from all three major creditbureaus, for free, by registering at annualcreditreport.com. While most credit monitoring services are a waste of money, a simple service that notifies you of reporting changes or score adjustments could be advisable, especially if you are planning on applying for credit in the near future.
- Pay down debt aggressively. Keep overall utilization below 30% (the lower the better). A lender may reduce your credit line, but is less likely to cut your card privileges altogether if you show a balanced approach to account management.
- Carry a backup credit card. Don’t risk getting stuck at the register with a card that won’t take charges. Comparison shop for a backup card and you may even find a better card than your current one in the process!
- Boost your emergency fund. You should not count on credit cards during household emergencies. Even if you can’t stash several months of expenses in a money market account, keep enough cash accessible if your credit card gets unexpectedly declined during a visit to a hospital, veterinarian, or auto repair shop.
- Use dormant accounts. Lenders like to reduce risk by pruning little-used credit card accounts from their portfolios. Since any account closure can hurt your credit score, you can help limit this risk by using all of your credit card accounts at least once every 6 months or so. Buying a stick of gum every 6 months will keep your account active in most cases.
If you have been affected by an unexpected credit card account closure, I can suggest taking a few more steps:
- Tell your story. Write to your bank’s executive board. Write to your legislators and to consumer protection agencies. Post your story online, whether in our comments section or on your own blog.
- Move your business elsewhere. If your primary bank dumped your credit card account without warning, consider moving your account to a community bank or to a credit union. Some card issuers that are larger than a typical community bank, like USAA or Simmons Bank, have also developed consumer friendly reputations.
Card issuers have crossed the line with this type of behavior. Now, they’re going to feel pressure from an American public that has grown tired of being treated like a line item on a spreadsheet. This story is turning into a PR nightmare for some lenders. If consumers keep venting their frustrations, things can and will get better.
While I do appreciate the right of an issuer to close an unsecured credit account (and do fully realize that they are for-profit institutions), issuers should at least notify us before doing so. Notifying customers after they have been embarrassed due to the fact that their card was declined while trying to check-out at a grocery store is totally reprehensible! Power to the people!
More Resources:
Curtis Arnold, a nationally recognized consumer educator and advocate, is the founder of CardRatings.com and has been educating consumers about credit cards since 1998. He is regularly interviewed and quoted by respected members of the national press regarding consumer credit issues. He is the author of How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line (FT Press, 2008) and is the co-author of The Complete Idiot’s Guide to Person-to-Person Lending (Alpha, 2009).
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