Many credit card users end up with rarely used cards stored in a drawer or saved for a rainy day. But what happens when you don’t use your credit card for a while, and does it affect your credit score? Here’s what you should know.
I have an inactive credit card that still has a balance. What should I do?
If you’re not using your card and don’t plan to anytime soon, you should consider closing the account, consolidating credit card debts to a personal loan, so that you’ve got fewer bills to pay, or transferring the balance to a new card that you will use.
Why would someone have a credit card they don’t use?
Credit cards are an important part of financial education because they allow consumers to build a good credit history. For the most part, credit lenders want customers that can use their product (credit cards) frequently in the hope that the borrower will accrue interest on their purchases.
However, many credit card holders have multiple cards open that they rarely use. It might seem counterintuitive to have open lines of credit that you’re not using. Still, there’s a strategy behind this: The more credit available to a user, the better their Credit Utilization Ratio (the amount of credit used over the total available credit) is.
There’s also the added benefit of holding older cards and keeping them open to improve your average credit age. The older your credit average age is, the more likely you will get approved for a loan or receive a better interest rate on a new credit card application.
Do inactive cards impact my credit score?
Not necessarily, though it depends on your credit issuer. If your card remains inactive for an extended time, your lender may consider the account dormant and close the account. If this happens, your score could be affected by the change in your credit utilization and the average age of your credit (unless the account is relatively new).
Should you keep your credit card open?
While there are benefits to keeping as much credit available to you as possible, keeping inactive cards open isn’t the best solution for everyone. Here are a few considerations to think about if you’re debating whether you should close a card or not:
1. Is there an annual fee you have to pay to keep the card open? If you have to pay to keep the card open, you should close it and look for a 0% annual fee card instead.
2. Are there any benefits to keeping the card open, such as discounts or free services that you currently use? If there are membership perks that you rarely use, then it’s probably better to close it.
3. What are the potential consequences of closing the card to your credit score? Could you make these up with your other cards (request a credit limit increase on an active card, close a newer card instead, etc.)
4. How important are the benefits and drawbacks of keeping the card open to you?
5. Could the card get added to your spending rotation? If you receive a warning from your lender that the account could be closed due to inactivity and still want to keep the card open, consider putting a small monthly bill on autopay onto the card. Just don’t forget to pay the bill!
The bottom line
Credit cards are useful financial tools, but using them responsibly is essential. Closing an open credit card account can affect your credit score, so it’s crucial to weigh the benefits and drawbacks before making a decision.