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A Comprehensive Guide to Understanding the Benefits and Risks of Keeping Inactive Credit Cards
In the realm of personal finance the question of whether to keep credit cards with no balance has sparked numerous debates. While some advocate for closing unused accounts to simplify financial management others highlight the potential benefits of maintaining active credit lines. This article delves into the intricacies of this topic, exploring the advantages and disadvantages of keeping inactive credit cards, ultimately empowering you to make an informed decision that aligns with your financial goals.
Benefits of Keeping Inactive Credit Cards:
1. Enhanced Credit Score:
Credit utilization, which refers to the percentage of your available credit that you are currently using, plays a significant role in determining your credit score. Keeping inactive credit cards open can increase your total available credit, thereby lowering your credit utilization ratio. A lower credit utilization ratio is generally viewed favorably by credit scoring models, potentially leading to a higher credit score.
2. Longer Credit History:
The length of your credit history is another crucial factor that impacts your credit score. Keeping inactive credit cards open can extend your overall credit history, demonstrating to lenders that you have a long-standing and responsible relationship with credit. A longer credit history can positively impact your credit score, making it easier to qualify for favorable interest rates on loans and other forms of credit.
3. Access to Emergency Funds:
Life can be unpredictable, and unexpected expenses can arise at any moment. Keeping an inactive credit card can give you access to quick cash for emergencies. Even though it’s usually advised to avoid using credit for non-essential purchases, knowing that you have a credit card on hand in case of emergency can be reassuring.
4. Potential for Rewards and Perks:
Some credit cards offer rewards programs and perks, even if you are not actively using the card. These benefits can include cash back, travel points, extended warranties, purchase protection, and more. Keeping inactive cards with such benefits can provide you with additional value, even if you are not making regular purchases with them.
Risks of Keeping Inactive Credit Cards:
1. Annual Fees:
Certain credit cards may have annual fees, especially those with premium rewards plans or benefits. In the event that an inactive card is not being used, the annual fee may become superfluous. Make sure you weigh the advantages of keeping a card that has an annual fee against the expense of the fee itself.
2. Potential for Fraud:
Even if you are not actively using an inactive credit card, it is still vulnerable to fraud. Hackers can gain access to your card information through data breaches or phishing scams, potentially leading to unauthorized charges. Regularly monitoring your credit card statements and implementing strong security measures can help mitigate this risk.
3. Temptation to Overspend:
Having an inactive credit card readily available can be tempting, especially during moments of impulse purchases. It is crucial to maintain financial discipline and avoid using inactive credit cards for unnecessary expenses.
4. Potential for Account Closure:
Credit card issuers may close inactive accounts after a period of inactivity. This can negatively impact your credit score, especially if the closed account had a long history or a significant credit limit. Regularly using your inactive cards or contacting the issuer to request that the account remain open can help prevent closure.
Making an Informed Decision:
The decision of whether to keep or close inactive credit cards is a personal one that should be based on your individual circumstances and financial goals. Consider the following factors when making your decision:
- Your credit score: If you have a low credit score, keeping inactive credit cards open can help improve your score over time.
- Your credit history: If you have a short credit history, keeping inactive credit cards open can extend your overall credit history.
- Your spending habits: If you are prone to overspending, it may be wise to close inactive credit cards to avoid temptation.
- The annual fees: If an inactive card has an annual fee, weigh the benefits of the card against the cost of the fee.
- The potential for fraud: Take steps to protect your inactive cards from fraud, such as regularly monitoring your statements and using strong security measures.
Keeping inactive credit cards can offer several benefits, including improving your credit score, extending your credit history, providing access to emergency funds, and offering potential rewards and perks. However, there are also risks to consider, such as annual fees, potential for fraud, temptation to overspend, and potential for account closure. By carefully weighing the pros and cons and considering your individual circumstances, you can make an informed decision that aligns with your financial goals.
I have two cards that have zero balance that I keep open for emergencies. Is that okay?
Yes. Those open credit card accounts will probably improve your credit scores as long as you keep up your timely payments and take care not to overextend yourself.
Since a credit card is a revolving account, you are in charge of deciding how much you charge and repay each month. Since you are in charge, most lenders view your credit card account management as a reliable predictor of risk when determining whether to grant you credit.
The two most important factors in credit scoring are your payment history and your utilization rate. Your utilization rate is also known as your balance-to-limit ratio. It is computed by dividing the total amount of credit card limits by the total amount of credit card balances.
Since you mentioned that all of your accounts are balance-free, your low utilization rates are positively affecting your credit scores.
Maintaining open and active accounts is crucial, even though having no balance on them is excellent for your utilization rate. That means you may have to use them for more than just emergencies. The best method to make sure that your credit scores accurately represent your present credit management abilities is to use your credit card accounts on a regular basis.
If you charge minimal amounts and settle your balance in full every month, your account history will show prospective lenders that you are responsible with credit management. You also ensure that your credit card providers wont close your account due to lack of use.
Theres no need to carry a balance. Paying off the balance each month means youll avoid paying interest fees on your purchases. If an emergency arises and you are unable to pay off the debt in full right away, make plans to continue making your scheduled payments and contribute as much as you can each month to the debt.
You can benefit from building a solid credit history without taking on debt or paying interest by using your credit cards sensibly. Plus, the majority of credit card issuers now provide fraud protection, so even for regular purchases, using your credit card might be a safer option than using your debit card.
Thanks,Jennifer White, Consumer Education Specialist
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3 Reasons Why I Keep A Zero Balance on My Credit Cards
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