Ask John: Credit Card Issuer Closed My Account Because It Was Unused – Why?

John,
One of my credit card companies closed an account because it was "unused." My balance was $0 and I rarely used it. I always paid the balance in full each month. What did I do wrong? I thought not having a lot of credit card debt was a good thing. Why was I treated this way?

--Margaret, Allentown PA

Margaret, you haven't done anything wrong. In fact, you should be proud of yourself for avoiding credit card debt by paying your card in full each month. Assuming you're making all of your payments on time, you probably have very good credit scores. One of the best ways to earn great scores is to limit credit card spending.

No, you're doing just fine. The problem is that credit card companies are not doing so well. They're losing money, will continue to lose money well into 2009. Additionally, they are going to have to comply with some new customer friendly rules starting in July of 2010. The reason they've closed your account is because you're not generating any revenue for them. But, you still pose some amount of credit risk, even if it's minimal.

Credit card issuers generate income in a variety of ways. They make money when you use your credit card. They make money when you carry a balance from one month to the next. And they make money through fees. When you don't use your card, you don't generate revenue for them at all, unless you pay an annual fee on the card.

When you use your card, the merchant pays the credit card company a fee, called interchange. When you carry a balance from one month to the next, you pay interest. And if you make a payment late, you might have to pay a "late fee," which normally is around $35.

You didn't share your credit limit on that card, so I'll assume it's roughly $5,000. If you're not using the card but it's still open, the credit card company still has to live with the possibility that you could charge $5,000 and then not pay them back. This risk, while minimal, likely contributed to their decision to close your account.

If you do not use any other credit cards or you charge very modestly, your score probably didn't suffer too much damage. Having said that, you shouldn't assume that all is well. I'd strongly suggest that you check your scores AFTER the account has been updated as "closed" on your credit reports. Then you'll have a good idea what kind of damage was done and whether you'll need to replace the lost credit limit by opening a new credit card elsewhere.

As always, if you have any questions or comments please feel free to drop me a line at CreditExperts@credit.com

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