If you don’t use your credit card, your card issuer can close or reduce your credit limit. Both actions have the potential to lower your credit score.
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Your credit card issuer may close or restrict your credit line if you stop making new purchases with it, which could have an effect on your credit score. Your credit card may be closed or restricted for inactivity, both of which can hurt your credit score.
So you’ve got a credit card tucked away in your wallet, gathering dust because you rarely, if ever, swipe it. You might think it’s no big deal, but leaving your credit card dormant can actually have some unexpected consequences for your credit score.
The Lowdown on Inactivity:
Credit card companies aren’t exactly thrilled with inactive accounts. After all they’re in the business of making money and a card that’s never used isn’t generating any revenue. So, what do they do? They might take one of two actions:
- Close your account: This is the most drastic measure, but it’s not uncommon. If your card remains untouched for an extended period (the exact timeframe varies by issuer), they might decide to shut it down. This closure can negatively impact your credit score in several ways.
- Reduce your credit limit: This is a less severe but still impactful action. By lowering your credit limit, the issuer is essentially reducing the amount of credit you have available. This can lead to a higher credit utilization ratio, which is the percentage of your available credit that you’re actually using. A high utilization ratio can also hurt your credit score.
The Impact on Your Credit Score:
Now, let’s delve into the nitty-gritty of how a dormant credit card can affect your credit score:
- Credit history length: Your credit history is a record of how long you’ve been using credit responsibly. A closed account shortens your credit history, which can negatively impact your score.
- Credit utilization: As mentioned earlier, a higher credit utilization ratio can hurt your score. If your credit limit is reduced, it becomes easier to reach that 30% threshold, which is generally considered the sweet spot for optimal credit utilization.
- Credit mix: A healthy credit mix includes both installment loans (like mortgages or car loans) and revolving credit (like credit cards). If you close your only credit card, you’re reducing the diversity of your credit mix, which can also impact your score.
Should You Close an Unused Credit Card?
In most cases, it’s best to keep your credit card open, even if you don’t use it frequently. Here’s why:
- Maintaining a longer credit history: Keeping your account open helps to maintain a longer credit history, which is a positive factor for your score.
- Building credit utilization: Even occasional use of your card can help to keep your credit utilization low. Just make sure to pay off your balance in full each month to avoid interest charges.
- Preserving your credit mix: Keeping your credit card open helps to maintain a healthy credit mix, which can also benefit your score.
Alternatives to Closing Your Card:
If you’re hesitant to keep your unused card open due to annual fees or other concerns, consider these alternatives:
- Downgrade to a no-fee card: Many issuers offer versions of their cards with no annual fees. Downgrading to one of these cards can save you money while still keeping your account open.
- Use your card for small, recurring expenses: Set up automatic payments for a small monthly bill, like a streaming subscription or your phone bill. This will keep your card active and help to build your credit history.
The Bottom Line:
While it might seem tempting to let your unused credit card languish in your wallet, doing so can have negative consequences for your credit score. By keeping your card open and using it responsibly, even occasionally, you can help to maintain a healthy credit score and improve your financial well-being. Remember, a good credit score can open doors to better interest rates, loan options, and even employment opportunities. So, don’t let your credit card become a forgotten relic in your wallet. Use it wisely and reap the rewards of a strong credit score.
Your Credit Score May Be Affected
Although you may dismiss your credit card issuer’s decision to close an account you weren’t using anyway, you shouldn’t disregard it because it could have a big impact on your finances. Your credit score may suffer the effects of a closed credit card:
- Your credit history length may shorten. The length of time you have had credit is one factor used to determine part of your credit score. Your total credit “age,” which influences prospective lenders’ assessment of your suitability, can be lowered by closing a credit account, particularly one that has been open for a long time.
- Your credit utilization rate may rise. Your credit utilization, which is the second-most significant factor in your credit score, indicates what proportion of your available credit you are actually using. Your credit scores may suffer if your card issuer suddenly closes your account, which will likely result in an increase in your credit utilization rate. It is advisable to keep your credit utilization below 30%; individuals with the highest credit scores usually have utilization of 10% or less.
- Your credit mix may be affected. Your credit mix is the variety of credit that you have recorded, ranging from revolving credit accounts like credit cards to installment credit accounts like auto and personal loans. Having some diversity in your credit mix can help your credit score because it demonstrates your ability to handle a range of accounts responsibly. Your credit score may suffer if your credit card issuer cancels the only revolving credit account you own.
Your Card May Be Closed or Limited for Inactivity
When you don’t use your card for a while, your credit card company has the right to close your account or lower your credit limit without prior notice. What period of time, you ask? Theres no predefined time limit for inactivity that triggers an account closure. To be safe, be aware that a prolonged period of inactivity could result in the deactivation of your account or a reduction in your credit limit.
Remember that the card issuer does not need to give you notice before lowering or eliminating your credit limit. Although they are free to act in either way without warning, you ought to still get an email explaining the changes made to your account.
Why I’ll Never Use a Credit Card
FAQ
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