by Joseph Kenny | 10/29/09

You can imagine the surprise of a customer who tried to pay for gas at a gas station with her credit card only to have it rejected. Anyone who has credit cards has experienced the embarrassment of having one of them rejected for any of a number of reasons.  It may be over the limit or there is a computer glitch.  But in this case, the gas card was rejected because it had been cancelled.

The card in question was a Shell Mastercard that had been issued by Citibank. Citibank had closed the account and did not tell the card owner. When the customer called to find out why her card had been rejected, she was told it was because her credit report showed a problem. So the card owner obtained a copy of her credit report and there was only one negative thing to be found and it had been created by Citibank.

On her credit report the Shell Mastercard account indicated “closed at credit grantor’s request”.

It may not seem right that a bank can close a credit card account without warning when the card owner has followed all the rules and pays the bill on time.  But the Credit Card Act does not prevent banks from doing just that thing because the bank always keeps the right to cancel the agreement.  It’s in the fine print that most consumers never read or only read cursorily.

When questioned, Citibank said that it had decided to close some, not all, of the Mastercards that were co-branded with an oil company. It was not just Shell Mastercards that were affected.  Also closed were some Mastercards co-branded with Citgo, ExxonMobil and Phillips 66-Conoco cards.

What is particularly interesting to note about the closing of these accounts is the fact that Citibank is still taking applications for the co-branded Mastercards. It doesn’t seem to make much sense to close good accounts while accepting new applications, but Citibank had nothing to say about this except to indicate it is the result of normal product review processes.

The question remains as to whether a credit card account closed by the issuing company impacts a credit rating. The answer is: maybe. It might or might not.  One of factors considered when evaluating credit risk is the ratio of credit balances to total available credit.  If available credit is cancelled then the ratio rises and that can hurt credit. This is called the ‘utilization ratio’.  In other words, losing a credit line could lower your credit score even if you have never missed a payment, always paid on time, and never exceeded your credit limit.

It may not seem fair to the consumer but the difficult economic conditions have led to banks needing to adjust their balance sheets.  Rising unemployment is leading to rising loan defaults. The goal of the banks is to minimize defaults while improving the financial condition of the bank itself. It is for this reason that Citibank has significantly lowered the amount of consumer credit issued over the last year.