A credit card that is canceled without your knowledge can lead to great embarrassment. You may be told that the transaction on your card has been declined when you attempt to make a payment after entertaining a group of friends or colleagues from the office at a restaurant.
If this happens, it certainly puts you in an uncomfortable position. But it is only an inconvenience and it can be sorted out by using another card or by paying in cash.
The position would be quite different if your card does not work when you are out of town or traveling abroad. The discomfort you undergo could be quite substantial.
Unfortunately, the cancellation of cards by credit card issuers is a common phenomenon. What’s worse is that they are within their rights to deactivate your card without giving any prior notice. It is important to understand the circumstances which could lead to your card getting unexpectedly canceled.
Using your card irregularly or not at all
This is the most common reason for your card issuer to go ahead with cancellation.
But how does it matter whether you use your card only once in three months or even less as long as you pay your dues before the stipulated date?
The answer to this question lies in the way in which banks work. When a card is issued to you, the issuer allocates a credit limit. If you make a purchase and do not fully pay for it, the bank charges interest on the unpaid balance. The interest rate can be substantial and is usually in excess of 10% per year or even more.
If you do not use your card, it is a lost opportunity for the bank. They can provide credit to some other client who may maintain an outstanding balance and give the bank an opportunity to earn interest.
Many people make a habit of paying off their entire credit card balance as soon as they receive the monthly credit card statement. This prevents the card issuer from earning any interest from the cardholder. But the bank still makes money from the merchant fee. This is the amount the bank charges the person from whom you have made a purchase.
Although this is a relatively small amount of about 1% or 2% of the transaction value, it can add up to substantial sums for the bank.
How does a bank decide to cancel your card for “irregular” use?
If you don’t use your card at all, there is a high likelihood of cancellation as the bank will not have any interest earnings or even income from merchant fees.
But how does a bank decide whether your usage is “irregular”? Each bank has its own method for determining the transaction level threshold below which it will deactivate a customer’s credit card. The process they follow can be quite complicated.
A lawsuit filed by Paul Dieffenbach Jr. against Citizen Bank for canceling his card revealed the complexity of the system used by the bank to take a decision.
The bank said that they evaluated a cardholder’s record based on “payments this month as a percentage of the amount due for last month, maximum balance as a percentage of credit limit in the last three cycles, length of time the account has been opened and total cash balance as a percentage of total balances in the latest three cycles.”
The court upheld the bank’s right to cancel the customer’s card.
It is very apparent that the law gives banks rights to cancel credit cards for a range of reasons and an inactive card is a good enough reason for cancellation.
Keep in mind that to remain classified as an active credit card user it is not necessary to have an outstanding balance. If you use your card regularly and pay off the entire outstanding balance at the end of each billing cycle, you will remain an active user and your card will not be canceled for this reason.
Cards can be canceled for default
Not paying your credit card dues can get your card canceled without any notice. It is quite obvious that a bank would not like to forewarn a defaulting customer before canceling the card.
In fact, the law does not require a credit card company to give prior notice to a cardholder if the reason for cancellation is delinquency, inactivity, or default. Banks are afraid, with a valid reason in many cases that if prior notice is given before canceling a defaulting cardholder’s account, the customer may use the opportunity to incur a large expenditure on the card with no intention of paying.
A drop in your credit score could lead to your card being canceled
Banks monitor the credit scores of their clients on an ongoing basis. A default on any other account, say on a car loan, could lower your credit score, leading to the cancellation of your credit card.
If the bank cancels an inactive card that you hold, it could also lead to a drop in your credit score. While non-use of a credit card is definitely not a reflection of your credit standing, a fall in your credit score could be an indirect fallout.
The length of your credit history is an important factor in determining your credit score. If the card that is canceled is an old account, it will have a negative impact on your score. Your credit score could also be affected if the card that is canceled is your only card.
Other reasons to cancel your card
Your card could also be canceled for a variety of other reasons, some of which are beyond your control. For example, the card that has been issued to you could be phased out by the bank.
If you take on a large amount of debt, it will result in a spike in your credit utilization ratio. This could provide a reason to the credit card issuer to cancel your card.
Steps that you can take to prevent your card from being deactivated
There is no sure-fire way to keep your credit card company from canceling your card. But taking a few basic precautions may prevent you from getting an unpleasant surprise the next time that you use your credit card.
- Pay on time – Credit card issuers would not like to continue dealing with a person who spends on a card and then doesn’t pay. Default by a single customer could wipe out the profits that a bank earns from dozens of cardholders who pay on time.
The most basic precaution that you can take to keep your card active is to pay your dues on time. If you want to avoid paying the high- interest rates that most banks charge, pay the entire balance when you receive your bill. If you don’t have enough funds to do this, at least pay the minimum amount.
Not paying any amount at all will attract several penalties and could include the cancellation of your card.
- Use your card regularly – Instead of paying with cash, make it a habit to use your credit cards when you can. Many people follow a practice of using only one or two cards and keeping the others for an emergency. This strategy can boomerang and the card that you have kept aside for an unexpected expense may get canceled without your knowledge.
One way to ensure that your card remains active is to use it for making your electricity or telephone bill payments. You could set up a standing instruction that these be paid automatically by debiting your credit card every month.
This technique can be of great help, especially if you have a card that carries a high-interest rate or an unattractive rewards program that you would not like to use on a regular basis.
- Keep a close watch on your credit score – A decline in your credit score could lead to your card suddenly being canceled. It is advisable to periodically check your score and if there is a fall you should take immediate corrective action.
Don’t reject a rate increase or other change – If the bank wants to increase the interest rate that is applicable on outstanding balances, it is necessary to give a 45-day advance notice to cardholders. This rule is applicable for annual fees also.
Under the law in force, you have the option of paying off your outstanding balance according to the old terms and refusing to accept the increased charges. If you do not agree to the revised rates, the bank will be within its rights to cancel your card.
If your card does get canceled, what can you do?
The very first step that you should take is to phone your credit card issuer and request them to reinstate your card. If the card in question is several years old and you have not used it recently, it is quite likely that it was canceled many months or even years ago.
In these circumstances, your only option could be to get a new credit card. This time around, remember to use it regularly to make purchases and to pay on time. Don’t forget that if your bank cancels your credit card it is not only an inconvenience but could also lead to a deterioration in your credit score.