Whether you have just one credit card or several, there can be times where you don’t use a particular credit card for a while. Unfortunately, you may get a letter in the mail saying the company is shutting down your credit card due to inactivity if you don’t use a particular card for an extended period of time.
On the surface, this doesn’t seem like a big deal. After all, if you weren’t using the card, it shouldn’t matter, right? Unfortunately, having a credit card closed for any reason could result in a dip in your credit score.
Here’s why and what you can do about it.
Will my credit score go down if my account is closed for non-use?
There’s a good chance your credit score will go down if your account is closed due to inactivity, especially if the card closed is one of your older credit cards or you carry balances on your credit cards.
A closed credit account can impact three of the five categories that determine your credit score including amounts owed, length of credit history, and credit mix.
Closing a card hurts your credit utilization
First, closing a credit card can negatively affect the amounts owed portion which accounts for 30% of your credit score. Closing a line of credit will reduce your total available credit. If you carry a balance on any of your other credit cards, this will essentially increase your credit utilization ratio which is your outstanding balances divided by your total credit limits.
Let’s say you were carrying $5,000 of credit card debt and had a total of $20,000 in total credit limits across all credit accounts. This would put your credit utilization ratio at 25%. However, if a card that had a $0 balance but an $8,000 line of credit was closed due to inactivity, you’d now have $5,000 of debt and only $12,000 in total credit limits. This would increase your credit utilization ratio to almost 42% which could hurt your credit score.
Closing a card hurts the length of your credit
Having an inactive account shut down can hurt your length of credit history which impacts 15% of your score. If the card closed is one of your older credit cards, this can reduce the average age of your accounts which will lower your score.
Additionally, if it is your oldest credit account, it could impact your score even more since the scoring formula typically looks at your oldest credit line, too.
Closing a card hurts your credit mix
Finally, closing a credit card account due to inactivity could hurt your credit mix portion of your credit score, as well.
If you only had one credit card, having that card closed would result in zero open revolving credit accounts which may negatively impact your mix of credit which accounts for 10% of your FICO score.
What companies close accounts for non-use?
All credit card companies have the right to close your account due to inactivity and don’t have to give you notice that they’re doing it. Credit card issuers may take many factors into account when deciding whether to keep your account open even if it is inactive.
For instance, a customer that holds many active accounts with large balances at an institution may be able to keep an inactive credit card open longer than a customer that only has a credit card account that hasn’t been used for years.
That said, it’s better not to risk closure because of inactivity. You can do this by making a small charge on your account every few months and paying it off in full when the statement arrives.
What should you do if you get notice your account will be closed?
If you get a notice your account will be closed, try calling the credit card company to see if they’ll reconsider the closure and keep your account open. In some cases, they’ll allow you to keep your card open but in other situations their decision is final.
If the credit card company decides to reverse their decision and keep your account open, make sure you charge something on the card to show them you’re going to use it again. If they decide to close your account for good, here are a few things you can do to try to improve your credit score.
What should I do if my credit score drops?
If your score drops from having an inactive account closed, you should focus on things that can help increase your score.
Make debt payments on time
The biggest thing you can do is make sure you make all of your payments on time as that is responsible for 35% of your credit score.
Reduce your credit utilization
Next, try to reduce your credit utilization ratio to get as many points as possible in the amounts owed portion of your score which accounts for 30%.
Keep your other accounts open
After that, try to keep the rest of your accounts open to keep your credit history, which accounts for 15% of your score, as long as possible. Just make sure your doing so doesn’t cost you money.
While credit mix accounts for 10% of your score, don’t apply for loans to try to increase this part of your score. Instead, only apply for loans you actually need and this portion of your score will grow over time. Finally, avoid applying for new credit unless it is necessary to keep the last 10% of your credit score, new credit, as high as possible.
Should I cancel my credit card if I don’t use it?
Now that you know credit card companies can close your account for not using it, should you proactively close your credit card?
In most cases, you should try to keep your credit card open to avoid a negative impact on your credit score. You can do this by setting up an automatic subscription on your card, such as your monthly Netflix membership fee. Then, put reminders on your calendar to avoid missed payments or schedule automatic payments to avoid paying interest and fees while keeping the card active at the same time.
If your credit card has an annual fee and you don’t use the card or any benefits it offers, it usually makes more sense to close the card rather than pay the annual fee. You may see a dip in your credit score, but it doesn’t make sense to continue paying an annual fee year after year only for your credit score.
Summary
Even though it doesn’t make sense to you, banks have good reasons to close inactive credit card accounts. Each open account costs the bank money. If you aren’t going to make charges on your card, the bank won’t make any money from you. In the end, closing an inactive account is a business decision.
Now that you know that banks can and do close inactive accounts, make sure you keep your accounts active to avoid potential damage to your credit score.
