Credit Card Limit Lowered by Company

[MelC]

Hi All- Question:

One of my credit cards that has a zero balance and a limit of $1500 was just decreased to $300, by the company. I really dont even want it anymore and can't decide whether or not just to cancel it. I have no use for a $300 credit limit. I have a zero balance on my other 3 cards too, one of them also had it's credit limit decreased due to "the current economy" although, not such a drastic decrease! I am thinking about using at least one of them again for something each month so that they don't see the inactivity as a reason to lower my limit.

I called the company to close the account and of course they groveled to keep it open and offered to send my details off for a credit limit increase inquiry but that meant going through all my credit details all over again- like I was applying for a brand new card! I said no thanks. They offered to give me 0% interest which also was no good to me as I carry a zero balance. I was very annoyed with this company, Ive been there for years.

And yes I know having credit cards around for emergencies may not be some peoples ideas of smart but it makes me feel safe and yes I have a nest egg/savings account I build up for emergencies I'd use first. Sometimes you just need a credit card! I posted this question on my usual forum and I just got lectured about having credit cards for emergencies.

So my question is- will it hurt my credit to close the account? Ive been there since 2007. I don't think having a $300 credit limit can actually help my score any on the other hand either..

Thank you all Savy Savers

[boosami]

In almost all situations, closing a credit card account can either reflect either neutrally or negatively on your credit score. Because there's typically no positive effect, many people prefer to leave accounts open and let them go inactive instead of closing them. Here are some of the effects of closing a credit card account...

A big factor in your credit score is your utilization ratio. That's how much debt you have compared to how much available credit you have. When you close an account, you lose whatever available credit you had there. This can cause your utilization ratio to go up, and lower your credit score. However, if the utilization doesn't change much (less than 10 percentage points), your score will not be significantly impacted. Typically this happens when you carry zero or small balances, have several cards with comparable or higher limits than the card you are closing, or the limit of the account to close is very low.

Your payment history is another big factor in your credit score. When you close an account, the good credit history from it stays on your report for 10 years from the date you close it (most negative remarks fall off 7 years after they were reported). So, you will not lose any good credit history until a decade after you close an account. In most cases, this will not harm your score because in 10 years you will have other accounts with good history and losing one account will not affect it significantly.

Another part of your credit score takes into consideration the average age of your accounts--the older the better. Contrary to popular belief, when you close an account, the "age" of that account still counts toward your average account age. It stays on your report for 10 years counting toward the average age. Similarly to payment history above, when it drops off you will not be affected because you will likely have other accounts since the closed one that will keep the average age from changing very much.

Finally, your credit score is also based off the "mix" of types of credit you have (credit cards, loans, mortgages, etc.). Having multiple types of accounts show you can be responsible with different types of credit. Most people have more than one credit card, so as long as there is at least one revolving account still open, closing one will not affect the "mix" of accounts significantly. Also, this makes up a comparably small portion of your credit score.

In summary... Closing a credit card account will not typically hurt your credit score, but it won't make it any better either. Before choosing to close a card:

• Be sure it will not impact your utilization ratio significantly (less than a 10 percentage point change)
• Know it is not your only revolving credit account
• Understand the long-term effects, but know they will not happen you for at 10 years and will probably be insignificant

[kork13]

Very well said, boosami.

MelC, I'd personally just close the card if you have no interest in keeping it. Definitely take into account those three points boosami gave, and also consider one more: closing an unused credit card makes you less susceptible to identity theft. So IMO, based on what you've said, I say close the sucker. Good luck dealing with the CC company, they'll beg and plead with you to keep it open -- talk about a headache....

[GREENBACK]

I'll just add that if you don't plan to borrow money anytime soon it isn't worth worrying about one way or the other.

[maryannsms]

Credit card companies are generally thrilled to give you an increase in credit, if they think you’ll use it and not go bankrupt. If you find yourself getting deeper and deeper into debt consider lowering your credit limit. Simply call up the credit card company and ask them to lower the limit on your card. This way you can still have the convenience of a credit card but you'll have some safe guards to help keep you from going deep into debt.

[MelC]

I'll just add that if you don't plan to borrow money anytime soon it isn't worth worrying about one way or the other.

Yes, you are right!

Well said Boosami- Thank you for all that wonderful information.

Kork13- that is a great point about identify theft threat.

OK, Im calling to cancel! I did read that you should ask them to write in that the account is being closed "at consumers request".

Thanks again!!!

[PennySaved]

Yes! Cancel it!

You'll be happy. It is 100% the right decision.