As the pandemic and economic crisis drag on, many businesses are finding that their financial state is fragile or faltering. Unfortunately, banks are becoming more risk-averse and some are closing accounts to protect their bottom line. Bank and credit card account closures are on the rise. In a recent news article, it was reported that 62 million credit cardholders have had their credit limits slashed or their credit cards closed in just the first four months of this year. And many of those people were in good standing with no late payments. And these actions aren’t just impacting credit cards; bank accounts are being closed too. In the UK, Tesco Bank announced that it would close all of its customers’ accounts by November 2021 because of low activity. So what’s the deal? Can a bank really just close your checking or credit card account and decrease credit limits without notice? And if so, what can you do about it?
A Right To Banking?
In the U.S., banking institutions are under no legal requirement to provide a checking or savings account to anyone, as long as their denial of an account doesn’t violate the law (i.e. they can’t refuse you an account because of your race, gender, ethnic origins, etc.). Since they’re in the business of making a profit, most financial institutions offer bank accounts to as many customers as possible. But there are circumstances where leaving an account open doesn’t make much business sense for the bank. Let’s take a look at the most common reasons a bank might close your checking account.
• Too many bounced checks and overdrafts.
If you have a habit of bouncing checks or overdrafting your account, then you might be at risk for an account closure.
• A negative or low balance.
If you have a negative or low balance on your bank account for an extended period of time, this may trigger the bank to close your account.
• High-risk industry.
If you do business in a risky or controversial industry (e.g. cannabis), banks may decide to close your account even if you have a high balance and are in good standing.
If you’re not making deposits or spending money in your account for an extended period of time, the bank may close it. Since it costs money to maintain accounts, it’s not profitable for banks to keep a high number of inactive accounts. This was the case with Tesco which said that only 12% of their customer accounts were used as primary accounts and that the vast majority of customers used their Tesco bank accounts just to park money. Note: An account may be considered inactive or dormant after 12 – 24 months of no deposits or withdrawals.
• Fraudulent activity.
If a bank suspects that your account is being used to engage in fraudulent activities it may close it. For example, your account may be flagged if an unusually large number of deposits or withdrawals are made in a short period of time.
• No reason at all.
The bank is not required to have a reason for closing your account. They can close it at any time. However, they are required to return your deposit in a reasonable amount of time.
One final note on account closures: If there is no customer activity on a bank account for 3 – 5 years and the customer has made no effort to contact the bank, the bank may consider the account abandoned.
What To Do When Banks Close Your Account
If you experience account closures, do the following immediately:
• Contact your bank.
Call and/or email your bank immediately. You might also consider going to the local branch where you opened your account. As a preventative measure, you should always maintain a contact at your local bank so that there is someone specific to talk to when you have issues.
• Stop all activity.
As soon as you learn that your bank account was closed. put a stop on all automated payments and deposits. If automated payments for your mortgage or other bills are sent to a closed account, you could accrue late penalties or other fees.
• Get your ChexSystems report.
This report is free once per year and it’s an easy way to see if there is any negative or inaccurate information about you on the report.
• Get your money.
Find out your bank’s system for sending you the money that was in your bank account. Do you need to submit a form? How long will it take? Can they transfer it to another account?
• Open a new account.
If you qualify, go to another bank and open a new account.
Sometimes, a bank will be willing to reopen your account depending on why they closed it. Inactive accounts may be reopened while accounts with a negative balance will probably remain closed at least until the outstanding balance is paid off.
A Credit Squeeze
As banks try to reduce their exposure to risk, some people may find their credit limits decreased or their credit card accounts suddenly closed without warning. This is especially true during an economic crisis. If the lender suspects that you’re in financial distress, they may move quickly to protect themselves. Here are some of the top reasons a credit card company may reduce your credit limit or close your credit card account.
• No activity.
Credit card companies close inactive accounts because they don’t make any money on them. But ironically, during times of crisis, credit card companies may also close inactive accounts because they don’t want to risk distressed customers leaning on the available credit line when they have little chance of repaying the debt.
• A drastic change in spending.
If you suddenly begin making a lot of purchases on a previously inactive or low-activity credit card, this may spook the lender, especially during a financial crisis.
• A credit rating drop.
If your credit score drops, this may cause the credit card lender to reduce your credit limit or close your account.
• There is an error on your credit report.
If negative information is reported on your credit report, the lender may reduce your credit limit because of it.
• Someone stole your identity.
It’s possible that someone is making bad debts in your name, and the lender is responding to that negative information.
• You’re too risky.
If you’re making a lot of late payments, the card issuer may reduce your creative limit.
What to do if your credit limit is reduced?
If your credit limit is decreased, you should immediately contact your lender and ask the following questions:
- Why was the credit limit decreased?
Lenders are usually willing to tell you directly why your limit was decreased. In most cases, it is because of too many late payments, maxed-out credit cards, or a high credit utilization rate.
- What do I need to do to restore the higher credit limit?
Simply paying on time for a certain amount of months and lowering your credit utilization rate might trigger the lender to automatically restore your credit limit.
- Will I be penalized for any over the credit limit charges?
Sometimes a decreased credit limit can put existing charges over the new limit. This can have a negative impact on your credit report and might trigger additional fees with the credit card lender. Check with them to make sure that these over-the-limit fees are not applied to your account.
- Get a credit limit increase elsewhere.
If you have another credit card, ask that lender for a credit limit increase immediately. This may help to reduce the negative impact on your credit score.
What to do if your credit card is closed?
If a lender closes your credit card account, this can have a drastic impact on your credit score. To minimize the impact, try to get the card reopened. Do the following:
Contact the lender and ask them why the account was closed.
Suggest a remedy.
Propose to the lender a remedy that might get the account reopened. For example, if the account was closed because you were over the limit, offer to pay off the over-the-limit charges immediately.
If the lender agrees to reopen the account, make sure that they are in fact reopening the old account. You don’t want them to open a new account as doing this might negatively impact your credit report. You want to keep the old account so that you can benefit from the age of the account and your history of on-time payments.
Bank and credit card account closures are happening. If it happens to you and if you’re unable to get your credit card account reopened, consider opening a secured credit card account. This way you can immediately restore a lower credit utilization rate and soften the blow against your credit rating.
Franchise Attorney Nate Riordan
If you have any questions about restaurant franchising and owning a small business, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 724-0846 to discuss your situation.