Inactive credit cards—those that are accounts available to use but that you’re not regularly using to pay for items—can damage your credit score in a few ways.
Impacts to your credit utilization ratio
First, your credit utilization on the account will be zero percent. That sounds like a positive thing, right? Well, yes and no. Yes, it’s good not to have revolving debt that takes years (or decades!) to pay off. But when a lender is considering your application for a new line of credit, the company wants to see a long history of good behavior from you. That means that you’ve used your credit and paid it off (or paid down the balance) on time. If you’re not using that credit card, then there’s no history for a bank to review; you’re not able to show them that you’re someone who is likely to pay their bills on time. While a lower utilization ratio is preferable to a high one, not using any of your cards can cause your score to drop a bit. You should use your card(s) at least once every six months; the amount purchased doesn’t matter. It is important not to confuse inactivity with not carrying a balance. You can pay your card off in full each month without hurting your credit score.
Account closure
Second, a credit card company may close your account due to a long period of inactivity. If this happens, your credit score can be negatively impacted. Here’s how: Let’s say you have two credit cards, each with a credit line of $2,500, giving you a total of $5,000 in available credit. You use one card for gas and grocery purchases to get airline points, but you also used that card for a splurge last year that you haven’t paid off; you have an $800 revolving debt. The second card is something you keep only for emergencies, and it’s been in your safety deposit box unused for two years. The credit company closes that account due to inactivity. Well, now, instead of having $5,000 credit available to you spread over two cards, you now only have one and $2,500 in available credit. And with the $800 revolving debt, you now have a 32 percent credit utilization ratio. The ratio was only 16 percent when you had the larger available credit with both cards. Try your best to keep your credit utilization ratio under 30 percent.
Reducing your credit age
Third, having an account closed can also shorten the average age of your credit history. And if you have just a few cards and one is closed due to inactivity, the types of credit metrics could be adversely impacted as well.
The credit experts at Scorewell are happy to offer a complimentary consultation about your credit situation. Connect with Scorewell today to discuss factors that determine your credit score and strategies to improve your financial picture.
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