Don’t use your cards a lot? Beware of this possible risk
Infrequent use of credit cards can have undesirable consequences.
- 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. If you pay off your balance in full each month, avoid interest charges, and use your cards regularly, you can build credit and earn rewards with them.
Sometimes, however, you may have a credit card that you don’t use. This can happen if the card was opened a long time ago and the bonus rewards program no longer matches your spending habits. Or it can happen if you’ve focused on paying off debt and waived charging for new purchases – or if you only keep a card for emergencies.
While there’s nothing wrong with having an open map that you don’t use often – or at all – there is a possible risk in doing so. Here is what it is.
Your credit rating could be affected if you don’t use your card
If you have a card that you don’t use much, you run the risk of the credit card issuer closing the account. Typically, this can happen if you’re inactive and haven’t used your card for a year or more, although different card companies may have different policies on when they 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 make no money from you if the card is not used, they have a strong incentive to take action and close your account – or reduce your credit. line dramatically – if your card is not used.
The problem is that if your credit card account is closed, it could hurt your credit score. This could make borrowing more difficult in the future, and it could also impose challenges in other transactions where credit rating is important, such as when signing a mobile phone or utility contract.
Why is having a closed credit account important for your credit score?
The involuntary closure of a credit card account by your card issuer could be a big problem, as your credit rating could be affected in many ways.
1. You could lose account history on your credit report
If you had a positive payment history on a card that had been open for a long time, closing it could do a lot of damage to your score. A longer credit history is better than a shorter one, although your payment history is the most important factor for your score.
2. Your utilization rate could increase
Your credit utilization rate is also a key component of your credit score, and it could be negatively affected by an account closure. Let’s say you have two credit cards with $1,000 available credit on each, and you have a balance of $500 on one and don’t use the other at all. Your credit utilization rate is calculated based on the credit used compared to what is available to you. In this case, you would use $500 of the $2,000 available credit, so your ratio would be 25%.
A ratio below 30% is necessary so as not to affect your score. If the unused credit card is closed by your card issuer, you will end up with a 50% credit utilization rate and your score will suffer.
To make sure that doesn’t happen, you’ll want to use your cards at least once every few months, even if you’re just making a small purchase and paying it off in full. This way you can keep your accounts active and you won’t have to worry about your score.
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