With the credit crisis worsening, card issuers, worried about exposure to the risk of credit card defaults, have begun to ramp down lending by issuing fewer cards, lowering credit limits, and closing dormant accounts.  This begs the obvious question: should you as a card holder be concerned?  The answer (as always) is that it depends on your situation and your goals.

If you view your financial situation as secure and are concerned with paying off debt, then this may not be a concern as having your credit limit reduced or your card closed simply represents fewer opportunities to charge up balances.

However, if you are concerned with preserving financial flexibility in a tough economic environment and feel that you might have to rely on credit cards should you suffer an economic setback, then you may wish to keep all of your cards open.  Similarly, if you are concerned with your credit score in the short term, you may also be concerned about having your limits reduced or your cards closed.  Why?  Simply put, even if it’s your bank who lowers your limits or closes your accounts, this can reduce your score.  To understand why, you need to know about the following factors that determine your score:

1. Payment history (35% of your score). This includes information on missed payments, late payments, bankruptcy filings, and any referrals to collection agencies.
2. Outstanding debt (30% of your score). This represents a snapshot of one’s credit line utilization, the amount of outstanding debt versus one’s total credit limit. The higher the utilization, the lower the score will be.
3. Credit history (15% of your score). Having a long credit history, including keeping cards open, improves the score.

Since a closed account or a lowered credit limit will increase your credit line utilization (you will have the same balance as before, but a lower total combined credit limit), this can reduce your score.  Similarly, closed accounts will reduce the length of your credit history if you have had these cards for a significant amount of time.

So how can you keep these dormant accounts from being closed?  The answer is fairly simple–just use your card.   If your issuer has lowered your credit line, you can often have it reinstated by simply calling your issuer to ask that it be restored.

However, all of this raises the obvious question of whether keeping access to credit is ultimately a good idea.  Again, the answer depends on your ability to manage your credit.  For many, open credit cards are a temptation to swipe. This If you have had trouble managing spending or do not have a process in place to track your debt, open cards can lead to mysteriously blooming credit balances.  In this light, make sure that if you do put a charge on your card, make sure that it’s minimal (e.g. a pack of gum per month) or make sure that your spending is part of your regular budget.

If you feel that you have the self control to manage your credit and a system in place that gives you visibility to your total debt balances each month, keeping your cards open can protect your credit score and give you added flexibility.   However, if you feel that your economic position is secure or that you can’t manage to keep spending under control, you are better off letting your issuer reduce your limits or close your accounts.

Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for lowering your interest costs and getting out of debt.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.