Not So Fast! Your Card's Been Canceled

If you use your credit cards for most of your purchases, it might be time to start packing a stash of emergency cash. These days, increasing numbers of enraged consumers are learning the hard way that their credit cards have been canceled: when they get the bad news from an apologetic merchant.

That's what happened to Eva Sztupka-Kerschbaumer, a Pittsburgh spa owner. She was finishing a lunch with clients in December at a swanky new restaurant when her First Equity business credit card was declined. "Fortunately, the waitress was very nice and didn't say anything -- she just wrote on the check, 'Do you have a different card?'" Sztupka-Kerschbaumer says. She soon learned why: unbeknownst to her, her bank had closed her credit account.

Sztupka-Kerschbaumer uses her credit cards to help keep products on the shelves of her spa, ESSpa Kozmetika Organic Skincare. And she worries that her reduced open-credit lines could leave her in the lurch. Why was her seven-year-old account closed? Eventually, she found out. "I did receive a letter stating that I didn't meet the bank's 'newly revised, higher lending standards,'" she says, including "not enough accounts reported open for a long enough period of time" and "insufficient amount of total credit available."

Credit-card issuers are required to notify cardholders when they make changes to the customers' credit accounts. But as notifications sometimes go out by regular mail, a card user might not get the message until it's too late.

Why are customers getting cut off? "The creditors are simply in trouble," says Cate Williams, an executive at Money Management International, a nonprofit credit-counseling agency. "They need every cent they can get moving through their books right now." Banks are suddenly cutting ties with cardholders whom they suspect could cause problems, Williams says, as well as those who use their cards infrequently. Cards that sit unused for nine months to a year are the most vulnerable, she says -- but issuers could cancel a dormant card sooner.

Banks began tightening their belts about a year ago, when the credit crunch began in earnest. "There are millions of cardholders," Williams says. "If they all started tapping into the well, the costs could go up for the creditor, and the potential of loss of any profit may go down." An HSBC spokesperson confirms that the bank is trying to reduce credit risk by reevaluating its cardholders -- and reducing or canceling some of its higher-risk and less active accounts.

Bryan Mitchell, managing partner of Consumer Financial Advisory Board in Clearwater, Florida, says individuals can't do much to protect themselves against an issuer that wants to snatch an account. "At the end of the day, banks can pretty much do what they want."

Monika Nagy is living proof that consumers are helpless. As one of 130 certified credit analysts in the U.S., Nagy, of Orlando, Florida, watches the credit system professionally. So it came as an especially nasty shock when HSBC closed her credit-card account in December after just three months of inactivity. When the banking giant purchased a credit-card portfolio from a smaller bank -- Ameriquest, the issuer of one of her cards -- she requested a contract with HSBC's credit-card terms but says she never received it. "I knew that credit-card companies have been changing their policies week by week," Nagy says. "I wanted to use that card ... understanding all the terms of the contract," she says.

The fallout from a cancelled card can be dramatic: with a reliable card suddenly sidelined, debt-to-credit ratios can skyrocket abruptly and send credit scores plummeting. Nagy's score sank from the flawless 800s to the tarnished mid-700s. Now she's fighting with HSBC to get her account reinstated and her score cleared.

Not surprisingly, Nagy advocates actively protecting your credit. "Every single month, check all your credit card bills and make sure they haven't changed," she says.

Mitchell agrees that the best protection is to vigilantly read statements and keep your card in circulation. "If you have some open credit-card accounts that have no balance," he says, "make sure you use them once in a while, so you have revolving credit."