Can Not Using Your Credit Card Hurt You?
Understand how not actively using your credit card can quietly affect your financial standing and future prospects.
Credit cards are widely used financial instruments that offer convenience and can help establish a credit history. This history, summarized in a credit score, is a numerical representation of an individual’s creditworthiness. A strong credit score is a valuable asset, influencing many aspects of financial life. Understanding how credit activity, or a lack thereof, impacts this score is important for maintaining financial health. This article explores the consequences of not actively using a credit card and its potential effects on one’s financial standing.
How Inactivity Affects Your Credit Score
Credit card inactivity can negatively influence a credit score through several mechanisms. Lenders rely on recent account activity to assess a consumer’s credit behavior. When a credit card remains unused for an extended period, it can result in a “thin credit file,” which means there is insufficient current data for credit bureaus to accurately evaluate creditworthiness. This situation can make it challenging for scoring models to generate a robust credit score.
The length of credit history is a component of credit scores, accounting for 15% of a FICO Score and around 20% of a VantageScore. This factor considers the age of the oldest account, the newest account, and the average age of all open accounts. If an older, unused account is eventually closed, it can decrease the average age of all accounts, potentially lowering the credit score.
Consequences of Account Closure
Credit card issuers may close accounts due to prolonged inactivity, often after a period ranging from six months to a year, though this can vary by issuer. The closure of an account, particularly an older one, can impact the length of credit history.
Beyond the length of credit history, an account closure can also affect an individual’s credit utilization ratio. This ratio compares the total amount of credit used to the total available credit and accounts for 30% of a FICO Score. When an account with an available credit limit is closed, the total available credit decreases. If existing balances on other cards remain the same, this reduction can cause the utilization ratio to increase, potentially leading to a lower credit score.
Implications for Future Financial Opportunities
A credit profile negatively affected by inactivity or account closures can create obstacles in various financial endeavors. A lower credit score or a “thin file” can make it more difficult to secure new lines of credit, such as mortgages, auto loans, or personal loans. Even if approved, individuals with less favorable credit profiles may face higher interest rates, increasing the overall cost of borrowing.
The impact extends beyond traditional lending. Landlords frequently check credit reports when reviewing rental applications, and a less-than-ideal credit history can hinder the ability to rent an apartment or house. Insurance providers in many states may use credit scores to determine insurance premiums, meaning a lower score could result in higher costs for policies like auto or home insurance. Utility companies and mobile phone providers may also review credit, sometimes requiring security deposits or offering less favorable terms to individuals with a sparse or damaged credit history.