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Credit cards: Use them or lose them © Tim Pannell/Corbis

The Basics

Credit cards: Use them or lose them

If you don't charge anything (or don't charge enough), some card issuers will cut you off, often with no warning, and your credit scores could take a hit as a result.

By SmartMoney

One of the biggest causes of the financial crisis was that Americans were borrowing (and spending) more money than they could afford to pay back.

So how are credit card issuers reacting to consumers' attempts to live a more financially responsible lifestyle? They're threatening to cut their credit cards off if they don't spend enough.

Loretta Maxwell of Troy, Mich., had thought her credit score of 790 would buffer her against most of the fallout of the credit crunch. When Chase closed her $6,000-limit card in December without warning after two years of inactivity, she called to fight it. She was unsuccessful.

"If you're not using it, they entice you to do so, and then the moment you don't spend enough, they cut your limit," she says.

Chase says it is standard practice is to review inactive accounts. "Inactive cards with large open credit lines present a real risk of fraudulent use and large potential liabilities for Chase," spokeswoman Stephanie Jacobson says.

Maxwell's experience is far from isolated. Most major issuers, including Chase, Bank of America, American Express and Citibank have been slashing credit lines and closing the accounts of those who don't spend on their cards regularly. Though these issuers are required to notify you in writing of an account closing, there's no requirement that they do so in advance. Even when they do give early notice, the only way a cardholder can stop the account from getting shut down is to start charging again.

In December, Discover reported that it had closed 3 million accounts during 2008 because of inactivity, and plans to cull up to 2 million more. A Discover spokeswoman says the issuer constantly re-evaluates cardholders' credit and assesses whether they have the most appropriate credit line and product.

Capital One is suspending accounts that have been inactive for at least a year, warning account holders they have only 60 days to redeem their rewards. "Some of these accounts had literally never been used," spokeswoman Pamela Girardo says.

A spokeswoman for Bank of America, meanwhile, says the bad economy prompted it to close accounts with zero balances that have been inactive for more than a year. American Express spokeswoman Lisa Gonzalez says it periodically reviews inactive accounts for cancellation. Citibank did not respond to requests for comment.

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From a business perspective, cutting off certain customers is a smart financial move, says Sanjay Sakhrani, an analyst with investment bank Keefe, Bruyette & Woods. Closing rarely used accounts lowers a card issuer's risk profile by keeping potential liabilities (i.e., the amount of credit available to cardholders) from outweighing the issuer's assets. Inactive accounts also cost the issuer money to maintain without providing the benefit of income from interest or merchant fees, Sakhrani says.

For consumers, however, account closings can be devastating, especially to their credit scores. Your credit utilization ratio -- the amount of your debt in relation to the amount of your available credit -- constitutes 30% of your scores, says Craig Watts, a spokesman for Fair Isaac, the company that calculates and issues the FICO credit scores that most lenders use. So when an account is closed, you have less credit available to you, and your ratio immediately jumps higher.

A person with solid credit scores of 720 whose utilization ratio jumps from 35% to 75% after an account is closed is likely see scores drop by "several dozen points," to somewhere in the 600s, Watts says. That's a far cry from the 760 (or higher) consumers need to get the best rates from lenders.

Continued: Loyalty might not save you

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