Despite A Strong Economy, Forced Credit Account Closures Are On The Rise

If the economy is doing so well, why are people having trouble paying credit card bills and having accounts closed? Credit scores provide a clue.

A low credit score is a solid indicator of risk for credit card companies. Involuntary account closures are approaching 20 percent for consumers with credit scores below 680, while transitions into serious delinquency are approaching 25 percent for those with scores below 620.

In addition, overall revolving debt has grown from $969 million in 2016 to $1.037 trillion as of the third quarter of 2018.

Given increases in debt and delinquency, card issuers believe they were too free with post-recession credit, and they are reacting accordingly. In the Fed's October 2018 Credit Access Survey, just over one in five credit card applicants were rejected. One year ago, rejections were at 14.4 percent.

Ironically, overuse of credit cards may have propped up our economy. Consumer spending accounts for just over two-thirds of America's economy. However, you don't have to join the overspending masses. Overspending is a great recipe for credit card rejection, or for missed payments and closed accounts if you already have a card.

Your credit reports and credit score are key to getting a credit card, while a strong budget is key to keeping one. A recent Rasmussen poll shows that almost three-quarters of Americans understand this, saying we need to cut back on credit card usage.

How do you keep your credit score high and control your debt?

Start by reviewing your credit report and look for reporting errors or signs of fraud that could be dropping your score. Immediately address any issues that you find.

Missed payments have a big impact on your credit score (and, consequently, on your card issuer's decisions regarding your account). You must make all payments on time, even if you can't pay them in full.

Do you have a realistic budget? That's the cornerstone of spending control, which improves creditworthiness in two ways. You can pay down existing debts while using less of your available credit.

Paying down existing debt shows creditors that you're heading in the right direction. They will be less inclined to close your account and may be open to extending more credit if necessary.

Credit utilization (the amount of credit in use compared to your overall credit limit) is one of the major factors in calculating credit scores. A good rule of thumb is to keep credit utilization below 30percent. Try to aim even lower.

Finally, don't open any more credit accounts than you need. Multiple applications will drop your credit score and give the impression that you're overextended on debt.

Credit card companies don't want to deny you credit — they don't make money without extending credit. Card issuers just want to get paid back for the credit they extend to you.

Avoid denials or closed accounts by showing responsible credit practices. Look at your finances objectively. Would you loan money to a stranger with your credit profile and payment record, or would you refuse to lend and immediately demand full payment on any current loans? Credit card companies will probably come to the same conclusion that you do.

Credit cards can be an effective way to manage money, improve credit, earn points, and travel with perks if used the right way. Benzinga's personal finance staff provides tips on using credit cards effectively.

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