A lot of you might be having multiple credit cards, out of which, one or two are completely unused for so long. It happens with most people having multiple credit cards. Reasons can be different like you might have got a better credit card offering a higher reward rate, your unused card might be having a high-interest rate, you might be having a credit card just for emergency purposes, or anything. In such situations, some people prefer closing their unused credit cards and others prefer keeping their cards unused yet open. But, have you ever thought about how an inactive credit card may affect your credit score? If Yes, this article will help you understand the same. Keep reading for more information:
Can Your Card Issuer Close Your Account Due To Inactivity?
Keeping your credit card inactive doesn’t affect your credit score directly, but it can have some indirect impacts on your score. When your card issuers notice that your credit card has not been used for a long time, they might decide to close your credit card and that is when your credit score gets affected. However, some card issuers warn or notify their cardholders before closing their credit card due to inactivity and some issuers just close their account without informing them. You might be aware of how closing a credit card impacts your credit score and that is what might happen if your credit card is inactive for a very long time.
Effects On Your Credit Score
Following are the factors that may affect your credit score if your card issuer closes your credit card due to its inactivity:
Credit Utilization Ratio
Your credit utilization ratio makes up 30% of your credit score and high credit utilization can have a really bad impact on your score. If one of your credit cards gets closed, your total credit limit will decrease and hence your credit utilization ratio will go high. However, it will only affect your credit score if you are using more than 30% of your total credit limit and not otherwise. For example, if you have 2 credit cards, each with a credit limit of Rs. 50,000, means your total credit limit is Rs. 1 lakh. Now, if you spend Rs. 25,000 in a month, you are utilizing 25% of your credit limit. But, if you are using only one credit card for every purchase, your second card might be closed by your card issuer, after which, you will be left with a credit limit of Rs. 50,000 only. Now, if you spend Rs. 25,000 in a month, your credit utilization ratio will be 50%, affecting your credit score badly.
Length of Credit History
The length of your credit history is also among the important factors that affect your credit profile as it makes up 15% of your credit score. And if your card issuer closes your credit card, this factor may get affected, especially if the closed account was one of your oldest credit accounts. The longer your credit history is, the better is your credit score.
What To Do?
If you have a credit card that you no longer want to use, leaving it totally inactive won’t be a good idea at all. However, if it charges a high annual fee, then you can consider closing it if it’s totally out of your use. But, if this is not the case and you don’t want your card issuer to close your account, here is what you should do:
- If you are not using a card because it charges a high-interest rate, you should try to use it at least once a month and then pay off the balance in full before the payment due date so that you can avoid the interest and keep your card active as well.
- If the reason behind your inactive credit card is that you have got a new card with a higher reward rate, you can use your credit card to automate utility bill payments, or for fuel transactions, and pay off the card in time. As most credit cards don’t offer a very good reward rate in these categories, you won’t lose many rewards. By doing this, you can keep your credit card active.
Keeping your credit card inactive will not affect your credit score until your card issuer closes your account as discussed above. So, it is highly advisable to use your credit card once every month or at least once every two months, so that it doesn’t get canceled by your card issuer, which can have a negative impact on your credit score. However, if an unused card is charging a high fee, you should consider closing it even before your card issuer does, but make sure that the card you are using the most, is the most rewarding one. In case of any further doubts, make sure to ask us through the comment section below!