Credit Crunch Affecting My Credit Cards

Last week, Capital One cancelled one of my older credit cards for non-usage. With credit card companies and banks scrambling for capital and looking to reduce risk, this was bound to happen. For background, I’ve had this card for almost 6 year and have only used it once for a promotional balance transfer. It had a $5,000 credit line and I haven’t used it at all since I opened the account.

From Capital One’s point of view, I can understand why they are doing this. It costs a few dollars to issue new plastic (every 2-5 years), and figure $.50 for every mail notice. My account probably costs Capital One $3-4 per year to maintain while I generate absolutely no revenue for them. In addition, with the current economic environment, I represent a liability. In many cases, people who start using their card after a long period of inactivity are often more risky; so, this is an appropriate action, in my humble opinion.

Now, with all modesty, this account closure has little impact on me. I have good credit and access to several other credit cards. But for others, this could be a very different situation since lowering of available credit could have a negative effect on one’s credit score. Here are some tips to protect against reduced limits and credit card closures:

• Have Multiple Credit Cards. Like any good stock portfolio, you should diversify your access to credit. Don’t let one bank control all your credit. People with good credit have 3-6 credit cards, on average.
• Use Your Credit Cards to Show Activity. My account was closed because I didn’t use it for more than 5 years. You should try to use each of your credit card a few times a year to show activity. I recommend gas or groceries since those are necessities that don’t encourage splurge spending.
• Be Consistent With Credit Usage. Erratic spend behavior can be another indication of risk. So, don’t charge large amounts or use cash advances unless this is your normal usage. Otherwise, your actions may trigger a reduced line or account closure.

If you read our blog frequently, you will think these tips are repetitive or are the same advice for other scenarios. The reality is that good credit habits are relevant in almost all situations so please forgive the repetition.