Fine print, Living with credit, Protecting yourself

Use a card or lose it: What would you do?

John Egan

Earlier this year, the issuer of one of my credit cards threatened me: Use your card, or we’re going to cancel your account.

Generally speaking, I don’t take kindly to threats, particularly from profit-seeking businesses. But in this case, I complied. For several weeks after receiving the threat by mail, I charged some small purchases (totaling around $300) to appease the card issuer.

And it worked – the account remains open, albeit with a zero balance once again.

Why did I cave? I was worried that if the issuer closed the account, the positive activity I’ve accumulated on that card would no longer benefit my credit report.

Was I right to be worried? Well, not as much as I thought.

To clear up my confusion about this, I reached out to credit-scoring expert John Ulzheimer.

Closing accounts and impact on credit utilization
Ulzheimer tells me that the only way closure of my account would have harmed my credit history would have been through the loss of the credit limit. The disappearance of that credit limit ($2,700) would have affected my credit utilization ratio, which conventional wisdom says makes up 30 percent of our credit scores.

“If the card had a high limit and you have balances on other cards, then the closure of the account would have increased your utilization percentage,” Ulzheimer says. “It could have increased it enough to cause your credit scores to drop.”

How much would my scores have dropped? That would have depended on the change in the utilization ratio, Ulzheimer says.

If the ratio had gone from 5 percent to 6 percent, that’s no big deal. But if the ratio had soared from 5 percent to 50 percent, “that’s bad news,” he says. Bad news, as in a possible decline in my credit scores. (Many credit experts recommend keeping credit utilization under 30 percent, but our own Barry Paperno says forget the 30 percent rule, it’s a myth.)

Potential effect on length of credit history
My other concern about the closure of the account was whether it would have damaged my length of credit history, which constitutes 15 percent of your credit scores.

Ulzheimer assures me this would not have been an issue.

“This is a very common myth, that you lose the value of the age of the card just because you close it. A 10-year-old card is still a 10-year-old card whether it’s open or closed,” he tells me.

“In fact, closed accounts continue to age,” Ulzheimer adds. “So a 10-year-old closed account will be an 11-year-old closed account next year. The age of the card isn’t of concern – it’s all about the loss of the credit limit that could be problematic.”

All in all, I’m relieved, since Ulzheimer says it was reasonable for me to be concerned about the closure of the account.

Doing the right thing
“Card issuers don’t make any money unless you’re using your card. Even if you don’t revolve a balance and generate interest income for them, they still make money off the swipe fees or interchange fees that are paid by the merchant when they accept your card for purchases,” he says.

“The issuer would rather give your line of credit to someone else who is going to use it. So you were wise to use your card and reset the activity clock. In fact, you’ve just motivated me to do the same thing with my Home Depot card.”

Now, I would have preferred cutting up my card, since I rarely use it. However, the prospect of the account being canceled spooked me. And now I feel reassured that I’m doing the right thing by keeping the account open – at least for now.

See related: How to cancel a card without hurting your score, Closed accounts affect your credit score, but maybe not how you think, New myth: Closing a credit card account always hurts your score

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