Does Having a Credit Card and Not Using It Build Credit?

A credit score serves as a numerical representation of an individual’s creditworthiness, influencing various financial opportunities such as loan approvals, interest rates, and rental agreements. Many people wonder if simply possessing a credit card, even without using it, can contribute to building a positive credit history. Understanding how credit is established and maintained involves more than just opening accounts; it requires active and responsible engagement with credit products. This article explores credit reporting, credit score factors, and strategies for using credit cards to build a healthy financial profile.

Activity and Credit Reporting

Maintaining an unused credit card does not effectively contribute to building credit because credit bureaus primarily report on account activity. Major credit bureaus, such as Experian, Equifax, and TransUnion, gather information directly from lenders and creditors. This reported data includes details about transactions, payment behavior, and current balances. Without regular use, there is minimal transactional data for these bureaus to record, which limits the ability to establish or improve a credit history.

Lenders voluntarily send updated account information to credit reporting agencies, typically on a monthly basis. If a credit card remains dormant, no new activity is reported, providing no insights into a cardholder’s financial behavior. While the account remains open, consistent inactivity generates little positive data for responsible credit management. Credit reporting is a voluntary practice, and not all lenders report to all three major bureaus, meaning the data available can vary.

Components of a Credit Score

A credit score is a complex calculation derived from various aspects of an individual’s credit report, with different factors carrying varying weights. Payment history stands as the most influential factor, typically accounting for approximately 35% of a FICO Score. It evaluates consistent on-time payments; late payments, especially those 30 days or more past due, negatively impact the score.

The amount owed, also known as credit utilization, is the second most important factor, making up about 30% of a FICO Score. This ratio compares the total outstanding balances on revolving credit accounts, like credit cards, to the total available credit limit. A lower utilization ratio, generally below 30%, is viewed favorably as it suggests responsible credit management.

The length of credit history contributes approximately 15% to a FICO Score. This factor considers the age of the oldest account, the age of the newest account, and the average age of all accounts. A longer history of responsible credit use indicates more experience and stability.

Credit mix accounts for about 10% of a FICO Score and reflects the diversity of an individual’s credit accounts. This includes a combination of revolving credit, such as credit cards, and installment loans, like mortgages or auto loans. Demonstrating the ability to manage different types of credit responsibly can positively influence this component.

New credit, also making up about 10% of a FICO Score, considers recent applications and newly opened accounts. Opening new credit can temporarily lower a score due to hard inquiries and reduced average account age. However, responsible management of new accounts can eventually benefit the credit profile. Applying for multiple new credit lines in a short period can signal higher risk to lenders.

Using Credit Cards to Build Credit

To effectively build credit using a credit card, consistent and responsible engagement with the account is necessary. Making small, regular purchases on the card and then paying the balance in full by the due date each month is a fundamental strategy. This practice ensures that positive payment history is reported to credit bureaus, which is the most significant factor in credit scoring. Setting up automatic payments can help prevent missed due dates, which could otherwise negatively impact the credit score.

Maintaining a low credit utilization ratio is important. Experts recommend keeping the amount owed on credit cards below 30% of the total available credit limit. For optimal results, aiming for a single-digit utilization rate can be beneficial. If an individual has a high credit limit, using only a small fraction of it demonstrates responsible borrowing habits and contributes positively to the credit score.

Keeping credit accounts open and active, especially older ones, contributes to a longer credit history, which is a favorable factor in credit scoring models. Rather than closing accounts, making occasional small purchases and paying them off can help maintain active status and build positive history. This approach helps to prevent a reduction in the average age of accounts and the total available credit.

Consequences of Card Inactivity

Leaving a credit card completely unused for an extended period can lead to several unintended consequences that may affect one’s credit profile. Credit card issuers may close an account due to inactivity, typically after a few months to a year or more. Issuers are not always required to provide notice before closing an account due to dormancy.

When an account is closed, it can impact two components of a credit score. First, the total available credit across all accounts decreases, which can cause the credit utilization ratio to increase, even if current balances remain unchanged. A higher utilization ratio can negatively affect a credit score. Second, closing an old account, particularly one with a long history, can shorten the average length of credit history.

An inactive account fails to provide ongoing data to credit bureaus, meaning it cannot contribute to building a stronger payment history or demonstrating responsible credit management. While inactivity fees were banned in 2010 by an amendment to the Truth in Lending Act, the indirect impacts on a credit score due to account closure or reduced credit limits remain a consideration. Therefore, even minimal, consistent usage can be beneficial for maintaining a healthy credit profile.