28 Jun When a bank cancels your credit card

Q. I recently received a letter from Chase Cardmember Services stating, “due to inactivity, your credit card account will close when your card expires.” I last used this account June 2015, always paying the balance in full. The account was opened in 1997. I really don’t need this card. What impact will this have on my credit score? It’s 841 and I take pride in having an almost perfect score.
— Almost perfect

A. Congratulations on your near perfect credit score.

The average FICO credit score in this country is around 695, so your history of healthy credit habits is great to see.

Your FICO score is a combination of various factors, all with varying levels of importance, said Chadderdon O’Brien, a certified financial planner with RegentAtlantic in Morristown.

The two largest components – payment history (35 percent) and amount owed (30 percent) — drive the majority of your score.

Other components such as the length of your credit history (15 percent), levels of new credit opened (10 percent) and types of credit used (10 percent) have smaller weights.

Your question relates to the disruption of a longstanding credit card, which will directly impact the length of your credit history.

An obvious question arises: why would a bank choose to discontinue a credit card when you have a long history of healthy utilization?

O’Brien said banks are in the business of making money and their credit divisions are free to extend, reduce or cancel lines of credit at their discretion.

“Since you have not been actively using the credit card, the bank may prefer to extend your line of credit to a different card holder who will use the card more frequently,” O’Brien said. “More frequent usage allows the bank collect more in fees.”

Lenders are also in the business of managing risk, O’Brien said. The bank’s credit division needs to manage how much credit it makes available at any point in time. In order to extend credit to a user who may generate higher fees, he said, it may need to terminate your line of credit to proactively manage its risk exposure.

O’Brien recommends calling Chase to discuss how the bank might be able to work with you.

“If you’d prefer to maintain this credit card, perhaps you can shift one or two monthly bills to this card going forward,” he said. “Since they are likely to handle terminated cards on a case by case basis it is worth asking the question in order to maintain the credit card.”

In the event Chase still decides to terminate your credit card, O’Brien said you shouldn’t be too worried.

While there is a chance a change to your “length of credit history” factor may impact your credit score, it is likely to be small and short-lived, he said. The impact would be far greater if the card was being cancelled due to delinquent payments or an outright default.

The termination of a credit card can also impact a ratio that is calculated based off your “amount owed” factor, which is important in determining your credit score. This is known as your credit utilization ratio.

The ratio calculates the amount of credit card debt you have relative to your credit limits.

In a scenario where a credit card is terminated, the denominator in this ratio immediately drops, O’Brien said.

“If a credit card user carries a balance from month to month, by rule, the credit utilization ratio will increase,” he said. “However, since you do not typically carry a credit card balance, the impact of losing this credit card to your utilization ratio is likely to be small. From FICO’s standpoint, credit utilization ratios below 25 to 30 percent are considered healthy.”

Based on what you’ve told us, it sounds like you have been doing all of the right things in managing your credit score over time.

“Since you don’t feel you need this credit card and the impact of losing it is likely to be small, you are in a good position,” O’Brien said. “Give the bank a call and see if they are willing to work with you. Otherwise, just maintain your healthy credit habits and your credit score will continue to impress.”

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This post was first published in June 2017.