Money Expert Q&A: When Stores Cancel Your Line of Credit

Answers for your personal financial-related questions and concerns

I’ve heard that you shouldn’t close a credit card–even if you don’t use it–because it can have a negative impact on your credit score.  However, I recently got a letter in the mail that my credit card account for an electronics store was closed due to inactivity. Will this have any impact on my score? Why would a bank close a card like this?

—A. Watkins
New York City

A closed account can lower your score because you’ll have less available credit. Consequently, your credit report will show that you are using much more of your available credit than you were before. Credit card issuers often close inactive cards, especially if the balance is zero, because they won’t be able to make money from your account. A portion of their profit is made from interest and fees.

Creditors use a calculation called a credit utilization ratio, which makes up 30% of your credit score. Credit utilization measures how much credit you’re using compared to how much you have available. Your credit score decreases as your balance increases in relation to your total available credit. The more unused credit you have, the better your score because it shows creditors that you’re responsible. This makes you a better credit risk. It’s best to utilize no more than 10% to 30%. Financial advisers give different percentages, but most agree on this range.

The degree to which the closed account affects your score depends on how much credit you have available. You didn’t mention how many credit cards you have, but if you have a few, let’s say more than three, it might not make that much of a difference if your account is closed. However, if you have two cards (the recommended amount), there will be more of an impact since there will be a lot less available credit.

This Q&A appears in the September 2010 issue of Black Enterprise in Shopsmart.

  • Maurice

    Stay away from borrowing money, African American stay away from borrowing, Practice saving and investing. There is notsuch thing as using credit wisely, its nothing but a trap!

  • Kevin

    I’ve also had the experience of having two cards closed due to non use and a line of credit reduced on the one remaining card that I have, due to the fact that I was only using a small portion of the credit line, and pay my bill in full monthy. The question that I now have is whether I should open up new credit cards, to replace the two closed ones and the reduction of the line since I know this affected by credit report adversely. I’m not sure that taking any action is benefitial since I would have no intention of using the new credit and would only be taking this action because I don’t know of any other way not to absorb these reductions of credit. I also know nothing stops the credit card companies from canceling the new cards do to lack of use. What action can one take to avoid being negatively affected by these changes?

  • If I have a credit card, but I pay in full every month, so the company isn’t making any fees or interest off of me, does this still help my credit? Add to? Mutual? or Doen’t help?

    • Kenya

      They still get fees each time you use the card.  Not carrying a balance helps your credit score because you have more available credit.

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  • Jane

    I just open a macy’s credit card. I am approved, but haven’t got my card yet. I am thinking about cancel it. Do you have any suggestions? Close it ASAP or just let it open?