Credit Cards

Don’t use your cards much? Beware of this possible risk

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Infrequent use of credit cards can have undesirable consequences.

Key points

  • If you don’t use a credit card often, it’s usually a good idea to keep it open.
  • Closing credit card accounts could hurt your credit score.
  • Sometimes card issuers will close your card if you don’t use it often.

Credit cards can be an important financial tool. By paying your balance in full each month, avoiding interest charges, and using your cards regularly, you can build credit and earn rewards with them.

Sometimes, though, you may have a credit card that you don’t use. This could happen if the card was opened a long time ago and the bonus rewards program no longer matches your spending habits. Or it could happen if you’ve focused on paying off debt and vowed not to charge new purchases, or keep a card just for emergencies.

While there’s nothing wrong with having a card open that you don’t use often, or at all, there is a potential risk of doing so. This is what it is.

Your credit score could be affected if you don’t use your card

If you have a card that you don’t use much, you face the possibility that the credit card issuer will close the account. In general, this can happen if you’re inactive and don’t use your card for a year or more, although different card companies may have different policies about when to close accounts.

Card companies are not required to notify you before closing an inactive card, although some do. Since card issuers have a limited amount of credit to extend, and they’re not making any money off you if the card isn’t used, they have a lot of incentive to take action and close your account, or reduce your credit. dramatically, if your card is not being used.

The problem is that if your credit card account is closed, it could hurt your credit score. That could make it harder to borrow in the future, and it could also pose challenges in other transactions where your credit score matters, like signing up for a cell phone or utility contract.

Why is having a closed credit account important to your credit score?

Having a credit card account inadvertently closed by your card issuer could be a big problem because your credit score could be affected in a number of ways.

1. You could lose the history of the account in your credit history

If you had a positive payment history on a card that’s been open for a long time, closing it could do a lot of damage to your score. A longer credit history is preferred over a shorter one, although your payment record is the most important factor in your score.

2. Your utilization rate could increase

Your credit utilization ratio is also a key part of your credit score, and could be negatively affected by closing an account. Let’s say you have two credit cards with $1,000 available credit on each, and you have a $500 balance on one and don’t use the other at all. Your credit utilization ratio is calculated based on credit used versus what is available to you. In this case, you would be using $500 of the $2,000 in available credit, so your ratio would be 25%.

A ratio below 30% is needed to avoid hurting your score. If the card issuer closes the unused credit card, you will find yourself with a 50% credit utilization rate and your score will suffer.

To make sure this doesn’t happen, you’ll want to use your cards at least once every few months, even if you only make a small purchase and pay it off in full. That way, you can keep your accounts active and won’t have to worry about your score being affected.

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