Credit Card Company Closes an Account - WHY? What Happens To My Score?

Here is a recent question from a client.  I think it is very appropriate for this blog:

A Credit Card Company (we will not disclose the credit card company – however we will refer to them as CCC) lowered my wife’s credit limit from $7500 to $1000.  Then she just got a statement saying they closed her account completely.  When she inquired they said it was because of a poor credit score.  She’s been paying bills on time etc…..where do you think this is coming from.  We’re a bit confused. 

CCC, quite frankly, did something kind of nasty.  Unless her balance on the card is $0, they could easily have hurt her score, because they increased her revolving debt ratio.  Here is what happens:  Let’s say, hypothetically, your wife has $10,000 in revolving debt with $20,000 available to her.  Her ratio would be 50%.  Understand that 35% of her credit score comes from revolving debt and how it is used.  If her revolving debt ratio is 50%, that is not bad.  However, CCC reduces her limit down to $1000.  Now you reduce her available amount of credit down to $13,500.  With her debt load of $10,000 and the available of $13,500, her ratio is now 75%, much worse.  That would lower the score.  Then they close her account, take away another $1000, and her ratio becomes 80%. 

For maximum scoring, the ratios for revolving debt should be under 15%.

Now, where it came from:  CCC may have changed their underwriting procedures so that they will not have anybody on their books with a score under 700.  That has been happening a lot lately.  So, they close her account.  How did they find out about her score?  In the boilerplate language of the application that was signed between your wife and CCC, Your wife authorized CCC to pull a credit report anytime they wanted!  This credit check “should not” hurt the score as it is considered a “soft pull.”