Reaching into my virtual mailbag for today’s post, I found several questions on the same general subject: credit cards—how to manage them and how to safely close a credit card account.
Boy, does this flood my mind with memories of not dealing well with credit myself. As you may know, my trip into the pit of credit card despair and the long but glorious journey out—all the way to debt-free!—not only changed the course of my life, I’ve had the joy of leading thousands of others out of that debilitating lifestyle as well. For that, I will be eternally grateful.
Slammed by a rate increase
Dear Mary: We have only one credit card with a balance of $18,000. The bank just gave us 45-days notice that our rate is going from 9.9% to 22.9%. I called to find out why and learned the bank pulled our credit reports that showed too much credit with balances that are too high. We have no late payments and decent credit scores. They will do nothing unless I can prove the credit report they pulled months ago had incorrect information on it. It was correct at the time. Is there anything we do? Donna
Dear Donna: The problem is you granted permission for the bank to monitor your credit reports and to increase your rate accordingly when you signed that initial application (it was buried in the fine print).
You must assume that the bank or issuer regularly monitors your account and personal information. And this time, they spotted a significant change in your utilization rate* and saw their window of opportunity to raise your rate.
You may not be aware that under The Credit Card Act of 2009, the new rate applies only to new purchases—starting the minute that new rate goes into effect.
Because your rate went up based on negative findings in your credit history, your issuer is required by law to review your account in six months for signs of improvement. If your utilization rate improves, the issuer must consider reducing your rate.
It’s not easy to win the credit card game, but it is possible. The sure way to beat them at their own game is to 1) know the law 2) keep your eyes on the fine print, and 3) your balance owing at $0.
*utilization rate measures how close you are to being maxed out on the account.
750 FICO score is nothing to sneeze at
Dear Mary: My FICO credit score is 750. The report I received says my score would be higher if I didn’t have so many open lines of credit—inactive credit card accounts I don’t use anymore.
I have heard that you should not cancel credit cards because it will hurt your score. In this case, would it be advisable for me to cancel these small credit cards anyway in order to improve my socre? Trent
Dear Trent: Crazy, isn’t it? If you have too much open credit, that’s a negative. If you close too many accounts simultaneously, that can be a negative because you’ve screwed up that delicate debt-to-available credit or utilization rate ratio. I can only imagine that you have so much available credit, you’ve tipped the scales in a way that keeps your score down.
But look, a score of 750 is very good. If I were you, and unless you’re getting ready to apply for a new mortgage loan, I would be satisfied and do nothing. If you decide to work at raising your score, close those extraneous accounts slowly—something like one or two every six months or so.
Playing with a full deck
Dear Mary: I just got my credit report and see I have many open accounts I haven’t used in years. How do I go about getting those puppies off?
Also, I have several accounts that I stupidly opened just to get an extra 15 to 20 percent off on that day’s purchase. Is there any risk to me closing all of these accounts, too? If I was carrying everything they show on my report, I’d have a full deck of 52 cards. Samantha
Dear Samantha: Wow, 52 credit cards? You’ve beat me, my friend, and that’s a record I gladly relinquish. At my personal breaking point many years ago, I was carrying 35 credit cards—every one of them maxed out and overdue.
Seriously, this is not a good thing. You don’t mention your credit score, which makes me believe you don’t know what it is. I’m guessing that your score has suffered from this heavy load of mindless credit gathering. You can use this free FICO Score Estimator to get a rough idea.
The money you saved on “today’s purchase” by signing up for all those cards surely pales by what a damaged credit score has cost you in higher insurance premiums and higher rates of interest on your mortgage and auto loans over the years. Closing these accounts cannot immediately undo the damage that has been done. In fact, doing that without a clear strategy could make things even worse.
Experts tell us you should close no more than three accounts per year, which in your case would take 17 years. However, carrying that 52-card deck is not a good idea, either. The great credit crunch that began in 2008 as the U.S. tumbled into recession may help solve the problem for you.
Right off the bat, it’s likely that many in your deck are for stores that have gone out of business. Mervyn’s, Circuit City, and Linens n’ Things come to mind.
Another consideration is that these days, some credit grantors are closing and canceling inactive, deadbeat, and dormant accounts. That may take care of a few more.
As for the rest, identify one or two of the bank cards (MasterCard or Visa) you’ve had the longest as the credit cards you will keep active, and close the rest at a rate of about one every four months or so.
As painful as it will be, I suggest you get your credit score now to know where you are. MyFico.com is going to charge you a few bucks, but it may be worth it to get the real deal knowing your information will not be used for marketing purposes. Another option: You can check your credit scores anytime, anywhere, and never pay for them at CreditKarma.com. You will need to create a simple, password-protected account. No credit card is required.
Alternatively, some credit card issuers make credit scores available as a perk of carrying their card, so you might want to check that out.
Once you have it, watch your score and your credit report like a hawk. With so much open credit you are very vulnerable to identity theft.
You should consider getting identity theft protection through a company like Lifelock. That’s the company I and my family use. I highly recommend Lifelock.
Breaking up is hard to do
Dear Mary: I want to start closing inactive and otherwise useless credit card accounts that show up on my credit report. But exactly how should I do that? That might seem like a dumb question, but I really don’t know what to do. Thanks. Cecily
Dear Cecily: Closing a credit card account is not for the faint of heart. If you suffer from the failure-to-follow-through syndrome, there’s not much point in getting started on this one. If, on the other hand, you have a penchant for organization, list-making, and follow-up, you’re going to love this.
But first, the facts. Banks, credit card companies, and retail credit granters are very keen on retaining their quality, revolving, or “open-end” credit accounts (from the Latin root meaning there’s no end to the amount of money we intend to squeeze from you during your lifetime).
These companies paid dearly to bait, snag, and reel you in. Since that time, you’ve rewarded them handsomely. They will not be happy when they learn you’re breaking up with them.
NOTE: It is not advisable to close an account until you have achieved a $0 balance. To do otherwise invites an interest rate increase to the maximum allowed by law.
Make the call
Find the toll-free number for customer service (it’s on the back of the credit card itself, the last statement, or possibly your credit report). Tell the customer service rep to close your account. Of course, you’ll get an argument, but stick to your guns: Close my account and report it to the credit reporting agencies (CRAs). If you are handed off to someone in Customer Retention, repeat: Close my account and report it closed to CRAs. Please.
Once you are successful, record the full name of this person and the date you made this request.
Send the letter
Immediately follow up with a letter that says the same thing, including the name of the customer service rep you spoke with and the date of that call. Make sure you give your account number, name as it appears on the account, and your phone number. If you still have it, cut the credit card into pieces and enclose them with the letter.
Send this letter by U.S. Certified Mail with Delivery and Signature Confirmation. This will cost you a few bucks in addition to the regular postage, which, as we know, increases about every five minutes or so.
About two weeks after that letter is delivered, call the credit card’s customer service again to confirm your account is closed. Assume it won’t be (they’re fighting you here, remember?). Repeat your verbal instructions: Close this account and report it as closed to the CRAs.
In about three months, order a copy of your credit report. If the account shows the account “Closed by request of customer” or a reasonable facsimile, you’ve achieved success. If not, go back, and start over. Make the call and go through all the steps again.
Repeat as necessary
You could get full cooperation on your first call. Or it could take several rounds to achieve a full and complete break up with this credit card account.
It’s easier to open than close a credit card account. Even if you have all the current information like your account number, customer service phone number, and address, it could cost you both in time, trouble and postage. If you don’t have all that information at your fingertips, your work will only multiply as you need to move into research mode.
Think about this the next time you’re tempted to complete a new credit card application.
In closing …
Click on Neil’s face for a happy tune, perhaps even a trip down Memory Lane that will get stuck in your head for at least a few hours.