Why “they” closed my credit card account.
I need a new credit card right away. I need one to help run my small business so that my transactions go smoothly and seamlessly. I have to replace my old, once highly rated business credit card because my credit card issuer decided to close my account through no fault of my own. My erstwhile credit card company has been in the news lately — Advanta is a card provider that championed small business owners. Not long ago, I was left high and dry with a form letter that announced that my account would be yanked right from under me in a few weeks. I’m one of a million or so credit card holders who got their accounts closed because business went sour for the card company.
So My Credit Card Account Got Closed. What Happened To Advanta?
Credit card companies are victims of this recession too. In the case of Advanta, they’re a small player in the credit card industry that catered to small business owners like myself. Well, you know just how much this recession has also been unkind to the mom and pop ventures out there, and as a consequence, customers have been defaulting on their debt more than usual. For Advanta, the default rate has been 16% to 20% leading up to their meltdown, which is twice the default rate reported at American Express.
Image by Knyar.net
The Balance Transfer Credit Card For Life
As far as all these delinquencies are concerned, we should have seen this coming given that Advanta was at one point, incredibly generous with the terms they had for their cards. For example, they had once offered a “balance transfer for life” credit card called the Advanta Life of Balance Platinum Card that charged 2.99% for as long as you had a balance. At one point, offers like these were easy to get. So when Advanta’s card sales exploded with tons of customers taking advantage of the balance transfer offer, it became too much to handle for the card company. Here was a prime example of a card issuer that didn’t have enough liquid assets to back their business, and a prime example of balance transfer cards gone awry. Simply put, they became a victim of their own success!
Credit Card Policy Changes: Reform Ahead!
So watch out for signs of struggle (or possible symptoms of a troubled issuer): to stay alive, Advanta began pulling unsavory tricks on their customers (even the good ones, like me!) until eventually, they could no longer stay afloat and had no recourse but to simply walk away from their credit card business. Some sneaky tactics that credit card companies can pull on you:
- Raising interest rates
- Closing accounts without warning
- Lowering and cutting credit lines
- Charging more fees
- Limiting or reducing your available balance.
Fear not though, because there’s reform ahead. There are now new laws that vow to instigate change in the credit card industry. Our post on the Credit Card Bill of Rights discusses this in more detail, but here’s a sampling of those regulations:
- There are restrictions on how credit card companies can raise rates. For instance, they can impose this change upon those customers who don’t pay on time. There will also be advanced notice for any such changes in the offing.
- Credit can only be extended to people under 21 if they can prove that they can pay off their debt or if they’ve got a parent or guardian co-signer.
- Fees can’t be hiked without advanced notice.
Hopefully with these rules written into law, we’ll find some relief from the fallout caused by the credit crisis. It certainly hasn’t been easy for either credit card holders and card companies alike. I’ll follow up next with some tips on how to deal with the situation when your card company misbehaves like this!
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{ 14 comments… read them below or add one }
AskMrCreditCard just recently put up a blog post about this. Hope you find another worthy card!
I had the same problem with Advanta. What a pain especially with short notice. I posted the letter on my flickr account if any of your readers are interested in seeing the form letter they sent out. (Saw your post via Twitter)
About Mr CC, that’s interesting! I’m going on blog talk radio with him next week. Maybe we can talk about it then! 🙂 I’ll check out his post on this.
Brett, I was going to post our form letter too, but I think my husband threw it away (ha, we were so miffed, we just crumpled and rolled it into a ball and tossed it)! Oh well, yours will do! Thanks so much for giving us the scoop on the letter.
I dont think you mentioned this in the post, I re-read just to make sure, but did you have a balance outstanding with them when they closed? If so, how did that work?
How is a small business owner credit card different from other credit cards?
I had never thought about credit card companies going under. But it makes sense. I knew some of those companies were in trouble.
That is going to effect a lot of small businesses. I know of someone that went bankrupt 20 years ago. They had a toy shop and their credit was pulled right before christmas and they were not able to stock up. It had been profitable for the last several years but alot of that profit came during the holiday season.
If multiple cc companies falter this could have a pretty large effect on small businesses.
I’ve had a Capital One credit card for years. Paid it off monthly, had a real good rate and they sent me a note – went up to 29%. Guess I wasn’t profitable enough for their either. It’s okay because I don’t carry a balance but I would sure hate it if I did.
Citibank sent me a notice at the end of last year stating that they were going to close my account due to inactivity. I called them up and canceled the card myself. That wasn’t a good idea. My Citibank card was my second oldest credit account. Canceling the card caused my credit score to drop 12 points. The FICO scoring model doesn’t care who closes the account. If I knew then what I know now, I would’ve just charged a pack of gum to keep the account open.
I wouldn’t jump around for joy over the new regulations, especially the restriction on raising rates.
This bill does nothing for people who pay in full every month, it only helps those who carry balances. Temporarily. But with the default rate of 12% and climbing, and inability to raise rates to compensate for extra risk, the cards will simply a) deny cards to many of those people who actually are now shouting from joy b) start with higher rate upfront c) reduce the number of perks d) introduce additional fees such as annual fee and/or reduce or eliminate grace period. As usual the bill is meant to bail out irresponsible borrowers at the expense of responsible card users.
As to interest rates, do a little math. Imagine you lend $1000 to 10 people at $100 each, and 10% of people or 1 person out of 10 will default. How much will you need to charge the other 9 just to get your money back? But 12% is average default rate, which means that in some subgroups the rate of defaults may be lower and in others it may be as high as 20% or even higher. But if 2 out of your 8 borrowers default, how much would you need to charge the other 8 to get back your $200 lost?
But that assumes that the cost of money to you is $0 and you lend everything. But banks get most money for lending from your deposits, so there is some interest they pay, so you have to add that. Banks also don’t lend all the money, they put some of it – normally 10% but in current environment much more – in reserve. Then there are operational expenses like employees salaries, rent, taxes. No business operates without profit, so there has to be some profit too. So the interest charged has to a) cover the losses b) cover interest payments on deposits including money placed in reserve – the higher the amount you put in reserve, the more interest you need on the money you do lend c) cover business expenses d) cover money given to those who don’t bring profit i.e. those that pay in full e) bring profit. When you factor all of that in, the interest charged doesn’t seem that high, does it? Imagine you own a bank and try to calculate how much interest you’d want to charge with different rates of defaults.
I just stopped by BofA on Friday and they do have a business credit card as well. I am not sure where you have your account but all of your major banking centers should have a business credit card for you to use.
For the person who had their Capital One card rate raised, you are correct, you are not a profitable customer for them. Capital One was designed around revolvers, those who maintain balances, not those who pay it off every month. When you call, and they pull up your account, it tells the CS rep right away whether you are profitable or not, which tells them which options they have for dealing with you.
Let me try to answer a few questions made here.
@Doctor S: No, I did not have an outstanding balance with Advanta, but I believe that for those who did, Advanta simply left the balance in place, allowing the cardholders to pay it off over time. You just couldn’t make new purchases on the card. The question is, I wonder if this type of account closing will affect my credit score. My guess is that it will, just as if I did the card cancellation myself (as per Shawanda).
@Manshu: Your question is fodder for a new post I’m concocting! 🙂 You asked “what’s the difference between business and personal credit cards”. In short, business cards allow you higher credit limits, different perks (focusing on business) and the ability to separate credit liability from that of your personal account.
If anyone else has points on these matters, drop us a line!
One thing I find interesting is this new law has a part “Credit can only be extended to people under 21 if they can prove that they can pay off their debt or if they’ve got a parent or guardian co-signer. ”
At 18 you are an adult and can enter a contract. Between 18-21 you would be asked to prove or provide additional information that someone older then you would not have to prove. How can this be legal? I really hope someone challenges this section of the law. Seems like age discrimination to me….or am I making too much of it?
I’d have to agree that it appears to be age discrimination, but I’m not well enough informed to say whether it is right or wrong.
I have received a letter from Shell that they will close my account on the 18th of the month because of a credit bureau report. My account has always been current. I am just mystified by this.
Thanks very much,
Calvin White