Pay your bill, lose your credit line

It's a widely told story that credit-card companies are whacking credit lines left and right. Just like so many of the customers they serve, they relied too much on leverage during the boom years, and now they're trying to dig out from under the financial rubble.

But here's a twist I hadn't realized: Paying off your bill is a good way to get your card terminated.

My friend A. has been an American Express customer for most of this decade. She carried a balance on the card, but never once paid a bill late, and generally paid more than the minimum owed. Recently, she consolidated various bits of debt, and in one fell swoop paid off all of her credit cards.

The next day, most of them started rejecting charges.

A. was sort-of prepared for this. An ongoing divorce and consequent delinquent mortgage (for the house she moved out of that her ex-spouse can't afford to maintain) has done unpleasant things to her credit score, and she figured that if she paid off outstanding balances, her credit-card lenders might carpe diem and reduce her available credit lines.

So she called them right after she zeroed out the bills, starting with Amex. "Should I expect my credit limit to be reduced?" she asked. Nope, not at all, the Amex rep assured her. No signs of a review on her account, no red flags -- she was all set.

Less than 24 hours later, we stood in a store watching her card get declined. As A. rang Amex on her cell, the Army & Navy shop owner was on the store phone with Discover, A.'s backup card, which was also bouncing charges.

Several phone calls later, the story that emerged: A. had never been late on an Amex payment, but she had a habit of paying "too little" on the account, saith the rep. (What's too little? Who can say? Something between the minimum due and the full statement balance, it seems.) Something in the system flagged A. as a bad credit risk, so the moment her card balance hit $0, Amex took the opportunity to clamp down and close her account entirely. No notice, no warning.

And because the account had been closed, there was no possible way to resurrect it. If A. wanted a credit line with Amex (not bloody likely, at that point), she'd have to open a new account -- thereby hitting her credit score yet further, by closing out one of her oldest credit lines and simultaneously putting in a request for a new line.

This happened on two of her four credit lines. To Discover's credit, it didn't terminate the card. It just bounced attempted charges for a few days as a fraud protection measure, because the massive payment to zero out the card struck its anti-fraud algorithms as strange. (Are there fraudsters who pay down your credit cards? If so, hit me please!)

So, be warned: If you're considering paying off a card you would like to keep using, it might work in your favor to not let the card go to a zero balance. Keep a bit of a balance on it -- less than your statement balance, so you don't owe finance charges, but something north of $0 -- so that the account still has activity.

Otherwise, your credit-card lender may decide that any risk at all is one it doesn't currently want to run.