I’ve been hearing more and more about credit card companies lowering limites or even cancelling credit cards that are not used.  I only use two credit cards so at first I didn’t think that it mattered much to me.  I have three unused cards that I’ve kept just because I figured it wasn’t hurting anything, and would be there in the unlikely event that I need them.  But after reading some of the articles discussing this change, I realized that cancelling credit cards can negatively affect my credit score.

As I mentioned, I use two credit cards. One is an American Express Gold Card on which we put all of our personal expenses. It get’s paid off every month, so it offers an easy way for me to manage my spending, something that we’ve been working harder on lately, and it gives me about 1% back in the form of rewards, which I typically cash in to use at Home Depot.   My other credit card is an American Express Blue Card which I use to purchase inventory for an online business. It has a high limit of $35,000 and lately I have carried a balance on it that is very close to the limit.  (It’s also the card that Amex lowered my interest rate from 10.99% to 6.99% on.)  The other four unused cards have credit limits of $13200, $9600, $7400, and $6000.

So what does this mean to my credit score?  Well, to begin with, the fact that I keep such a high balance on my Blue Card means that my balance to limit ratio on that card is very high… 90%+ most months.  That has a negative impact, and I’ve often considered moving part of the balance to other cards just to even things out a bit.  The overhead of managing multiple cards though has always outweighed the perceived benefit.  Plus, I don’t plan to need credit in the near term.  Now though, I wonder if I may be at risk for losing those other cards if i don’t use them. . . I also wonder whether I care.

Bankrate.com recently posted an article about “credit card horror stories” where people with good credit were seeing drops in their credit limits by as much as 90%.  One guy went on the offense when he was informed by his credit card company that his card was being cancelled:

“I called them and told them that I wanted to cancel my card, due to nonactivity. They then transferred me to an accounts adjuster, who offered me a 3.99 percent fixed APR on higher interest cards till the bill was paid off. I transferred balances on two higher interest cards, and they are keeping this account open.”

An articles at smartmoney.com gave some statistics from American Express.  They do routine adjustments of their card holders accounts, but in the past year the percentage of account limits that went down was much higher that in previous years:

“Recently, American Express adjusted the credit lines of 20% of its credit-card holders. (This does not include holders of its green, gold and platinum charge cards.) This is something that the company does on an ongoing basis – but what’s unusual this year is that 50% of those customers saw their credit lines reduced, says American Express spokeswoman Kim Forde. Prior to the subprime meltdown (which started last summer), only 20% of customers typically experienced cuts during these periodic reviews.”

SmartMoney.com

They went on to say the part that affects/concerns me the most though, and that relates to the negative impact that having your credit card limits lowered can have on your credit score.  Banks look at the ratio you carry of revolving debt to available credit and having your credit card limits lowered will negatively impact that ratio:

“Those who carry credit-card balances will also see their credit score drop, says Daniel Ray, editor-in-chief of CreditCards.com. Roughly one-third of your FICO credit score is influenced by how close you are to your credit card’s limit, says Gerri Detweiler, credit advisor for Credit.com. Someone with a $5,000 balance on a card with a $15,000 limit is using 33% of their credit line. But if that limit drops to $7,500, they’re now using 66% of their available credit. Higher utilization rates (the amount of a credit line that you use) result in lower credit scores, which makes qualifying for a car loan, mortgage or home equity line of credit more difficult, says Ray.”

That can be scary to a lot of people, and talk about it’s impact and what to do is picking up steam in the blogsphere as well. PaidTwice talks about it on her blog in the article “Credit Might Be Drying Up - Should I Be Worried?“  I think I like her response the most.

“But then I realized, I didn’t actually care.  If all our credit cards get closed because we don’t use them - I’m okay with that.  I’d rather that than using the cards and feeling dependent on them.”

I’ll stick wtih PaidTwice on this one and let the cards fall where they may. If keeping the cards open requires no work from me and helps my credit score… then great.  But I’m not going to charge something on a card just to keep it open or to keep my balances high. Hopefully my credit score won’t suffer too much as a result.