Credit card use is a staple in most consumers’ financial lives. The ability to pay for large purchases or unexpected expenses outright when savings isn’t available or is earmarked for another objective is a valuable tool.
However, the use – and non-use – of credit cards is also an important factor in credit score calculations. How you utilize a credit card impacts debt ratio, payment history, the length of your credit track record, the mix of credit you have, and the new credit you take on. Using no more than 30 percent of your available credit limits across all credit cards is a sound practice, as is having a variety of credit cards and other types of loans to show responsible use and timely payments over time. But when you don’t use a credit card, it can negatively impact your credit score.
There are several reasons why credit cards may lie dormant in your wallet or desk drawer. For some, credit card rewards are no longer advantageous enough to use the card on a regular basis. In other situations, credit cards that have been open for several years may simply be forgotten and replaced with the latest, best credit cards. No matter the reason for an inactive credit card, there are a few things you should know about its impact on your overall credit profile.
What Happens to the Credit Card?
When a credit card isn’t used for an extended period of time, meaning more than several years in most cases, credit card issuers may opt to close the credit account without much warning. However, credit cards that charge annual fees do not have an inactivity issue as the fee is always charged to the card. Non-fee credit cards are of the highest concern when it comes to inactivity.
Every credit card issuer deals with inactive cards in different ways. Some may leave the card open but note that there has been no activity for several years, while others may close the card and notify the cardholder in writing of their decision. There is no standard rule of thumb for how long a card has to be inactive before automatic closure may take place, so it is necessary to check with the credit card issuer or the credit card agreement to determine these guidelines.
What Happens to Your Credit Report?
A closed credit card due to inactivity shows up on your credit report like any other closed account in good standing. It is not necessarily a positive or a negative on your credit report. The biggest impact to your credit from a closed credit card comes by way of your credit score, explained next.
What Happens to Your Credit Score?
If a credit card is not used for some time and the card issuer decides to close the account, your credit score could be in for a negative hit. Because available credit from all sources creates your utilization rate, having an account closed involuntarily may reduce your credit score.
This is particularly true if you have outstanding balances on other credit cards, or if your now closed credit card was open for a long time. The latter is true because closing a well-established account with several years of payment history lowers your average credit account length. In either case, it isn’t often beneficial to have an inactive credit card suddenly closed as it relates to your credit score.
The Best Way to Deal With an Inactive Card
If you are concerned an inactive credit card will negatively impact your credit score, there are a few strategies you can implement to prevent the consequences. First, think about dusting the card off and using it for a small purchase here or there. So long as you pay the credit card balance off before the billing cycle, you aren’t charged interest and, most importantly, it keeps your account active.
Similarly, you can set up your monthly subscriptions that are just a few dollars each month to be paid by the credit card. This achieves the same end goal without creating a concern of overspending or excessive interest charges.
If the credit card is several years old, you will want to do what you can to keep it active in the eyes of the issuer. If it is a newly opened credit card or one that has a small credit limit, you may be safe letting it drift into inactive status and eventually allow the card to close on its own. Be sure to consider the history of the card in question, the credit limit, and your other credit card activities before letting a card become inactive.
Author: Melissa Horton
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