Wednesday, March 9, 2011, PM | Leave Comment
I have posted many articles about debt and how Americans were borrowing and, in turn, spending heavily more money than they could afford to pay back. That, in itself, turned out to be one of the biggest causes of the financial crisis the U.S. has ever experienced. But more recently, Americans have slowed down the free spending that they had become so accustomed to.
So how are credit card issuers reacting to consumers’ attempts to live a more financially responsible lifestyle? They are threatening to cut their credit cards off if they don’t spend enough.
Most major issuers, including Chase, Bank of America, American Express and Citibank have been slashing credit lines and closing the accounts of those who don’t spend on their card regularly. While these issuers are required to notify you in writing of an account closing, there is no requirement that they do so in advance. Even when they do give early notice, the only way a cardholder can stop their account from getting shut down is to start spending again.
Discover Card reported that it has closed more than three million accounts due to inactivity, and plans to do the same to two million more. Capital One is suspending accounts that have been inactive for at least a year, warning account holders they only have 60 days to redeem their rewards.
From a business perspective, cutting off certain customers is a smart financial move, according to some financial analysts. When the credit card issuer closes an account that has rarely been used, it lowers the company’s risk profile by keeping their potential liabilities from outweighing their assets. Inactive accounts also cost the issuer money to maintain, without providing the benefit of income from interest or merchant fees.
For consumers, however, account closings can be devastating – especially to their credit score. Your credit utilization ratio – the amount of your debt in relation to the amount of your available credit – comprises 30% of your score.
In a Nutshell
Use your credit cards more wisely. You don’t have to be a free spender, yet at the same time, you don’t have to hold back on spending completely. Moderation is the key for financial success. As long as you don’t go overboard, charge it to your credit card when you know you will be able to pay the bill in full and before the due date.