Close up of scissors cutting a credit card © Roy Hsu-Photographer

Maybe you've experienced this before: You get to the cash register, pull out your credit card, swipe it and are told it's declined. You try again. Same result. So you call the issuer and find out the account has been closed, despite the fact that you've never been late with a payment. "What even?"

If you're confused, you're not alone. This kind of thing happens -- and it's perfectly legal.

New regulations do nothing to help in this situation. The Credit CARD Act of 2009 helped to increase protection against interest rate hikes and overlimit fees. But credit cancellation policies remain largely unchanged.

"While the current act has done lots of great things for consumers, one of the areas where it has not been of help is in closing accounts or reducing credit lines," says Ruth Susswein, deputy director of national priorities for Consumer Action in Washington, D.C. "The card companies are still in complete control of how much of a credit line consumers have and how long they get to keep it."

Why would they do that?

Of course, an issuer can cancel your card if you fail to uphold your end of the bargain. Paying late (or not at all), going over your credit limit, failing to comply with your agreement or filing for bankruptcy are all legitimate grounds for closing an account.

But the reasons can be much less obvious than that. Credit card issuers are watching your credit record, and if anything there makes them feel that their credit portfolios are less secure than they'd like, they may suddenly pull the plug.

Sonya O. Conway, vice president of public affairs and communications at American Express said in an email that the company monitors cardholder credit behavior on an ongoing basis. "We look at a variety of elements, including their spending and payment history with American Express, their debt/spending/payment history with other lenders, credit bureau scores and other credit report information," she wrote.

If AmEx doesn't like what it sees, it may lower your spending limit or cancel your account. "Our intent is to strike the right balance between accommodating our card members' spending needs, while also prudently managing credit risk -- for us and for our card members," Conway wrote.

Chase follows a similar policy. The company declined a requested interview for this story. But the Chase Freedom credit card agreement says one of the reasons your account may be considered in default is if the company believes you "may be unwilling or unable to pay your debts on time."

Even if you're not in default, an issuer can boot you at any time. The most common reason is that you're not using the account often enough. From the issuer's perspective, it's better to give that line of credit to someone who will use the card frequently and rack up interest charges. "Sometimes we close accounts based not on your actions or inactions, but on our business needs," the Chase Freedom agreement reads.

Legal challenge fails

In Philadelphia, one consumer tried to battle a cancellation but found no relief. Paul Dieffenbach Jr.'s lawsuit against Citizens Bank was dismissed from an appeals court in February. Judges upheld the bank's right to cancel Dieffenbach's card despite the fact that he had never missed a payment and never asked for a line of credit increase.

The bank said Dieffenbach didn't score enough points in its system for evaluating accounts. Among the criteria the bank based his scored on were, "payments this month as a percentage of the amount due for last month, maximum balance as a percentage of credit limit in the last three cycles, length of time the account has been opened and total cash balance as a percentage of total balances in the latest three cycles."

Information Dieffenbach wasn't likely to be tracking.

But since canceling accounts is at the discretion of the card issuer, no laws or regulations are violated when a bank does so.

No notice required

Card issuers don't have to warn you when they plan to cut off your credit, either. Rules established under the CARD Act require creditors to provide written notice to consumers 45 days before an interest rate increase or a "significant change" to the account's terms. Diffenbach tried to argue that closure of his account amounted to a just such a significant change. The court agreed with Citizens Bank that it does not.

In fact, according to the Equal Credit Opportunity Act, creditors can close an account for delinquency, inactivity or default with no notice whatsoever. If they close an account for other reasons, such as an adverse credit report, they must notify the cardholder within 30 days after taking the adverse action. That doesn't do much good when you're trying to pay for your meal with a card that's unexpectedly declined.

"There's no notice required for an obvious reason," Susswein says. "They don't want you to run out and rack up a big bill if they've determined you're not creditworthy anymore. In practical terms, that can be anywhere from a real drag to a real problem."

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