Banks Can Cancel Your Credit Card Without Warning
The new credit card laws had unintended consequences as the banks moved to cancel your cards without notice. This practice was part of the positioning of big credit issuers that was common in the year before the new consumer protection law went into effect.
The new laws state the lender must notify you 45 days prior to changing terms of your credit account but that law does not apply to cancellations of credit cards.
If Citi, Chase or WaMu cancels your credit card they only have to notify you within 30 days after the cancellation with the reason the account was closed. Most often, the reason is a vague reference to information received from credit bureaus.
Unintended Consequences for Credit Card Users
In the fourteen months between the passage of new consumer credit protection laws and February 2010 when the law took effect, lending banks scrambled to realign their consumer credit account portfolios.
The result was highly damaging to the credit rating of many consumers. Interest rates were raised while spending limits were lowered on tens of thousands of credit card accounts.
Credit reports used to approve those credit accounts were re-evaluated and more strict qualifications were applied even if you had used your credit card in a responsible way for months or years.
Quietly, many top lenders are fast to cancel the cards already issued to consumers. The first you might know of the cancellation is when you tried to use the card for a purchase and the charge was declined.
Embarrassment and Frustration for Credit Card Users
You may have used your credit card last week for a purchase and know your debt is well below your spending limit. Yet when you present the card for payment today, it could be declined. A call to the lender is not helpful as you are only told an explanation is being mailed to you.
This can be highly embarrassing if you with others and especially if you do not have the cash or another credit card to use to complete your purchase.
The explanations provided when the lender cancels a credit card are often vague and point you to the credit bureau or your own credit rating as the culprit.
Sadly, one black mark on your credit several years ago may now be used as an excuse to cancel your card.
It is not one lender who will cancel cards of consumers. All of the major financial institutions have used this method to reduce risk. These include Chase, AmEx, Citi and Bank of America, to name a few.
Reasons for Cancelling
Lenders say they are managing potential exposure to risk by evaluating active accounts and closing inactive accounts. They claim a credit card seldom used with a large open credit line available presents a risk of fraudulent use and potential liability for their bank.
Reassessment of customers who have used their credit card for some time is referred to as “pro-active management” by lenders and was a serious problem for consumers in the months before new credit laws were put into effect.
Economists say credit lenders are also worried about the economic times and the high unemployment rate. They worry that declining home values, foreclosures and tight credit in the consumer marketplace might pose a risk for credit card users.
To be fair, the default rate for credit card debt has risen proportionately to the economic decline and high jobless rate.
This increase in defaults is at least in part due to the every rising credit lines issued by banks in years past. Nervous of the risk of further defaults, lenders have chosen to cancel the cards for thousands of consumers.
Though you have used your credit cards wisely and have not created debt to the spending limits on your cards, you should actively monitor your credit accounts for changes.
Consumer credit has been widely used and accepted as part of our daily financial management for several years. However, today you cannot count on your credit lines being available.
Failing to use your credit card for several months at a time may be reason for your lender to cancel the card. Plus, one bad report on your credit file can also be used as a reason!
The rate of activity for lenders who cancel the credit cards has slowed but this is due to previous high activity to re-align accounts rather than to the new rules.
P.S, for further reading, I recommed our first time card guide and credit card fraud protection tips.