If I Don’t Use My Credit Card Will My Score Go Up?

Not using a credit card might seem like a responsible financial choice, but its effect on your credit score is complex. Many believe keeping a credit card dormant or closing it leads to a higher score. This article explains how credit scores are calculated and how credit card activity impacts them.

Understanding Your Credit Score

A credit score is a three-digit number, commonly ranging from 300 to 850, representing an individual’s creditworthiness. It helps lenders and other entities assess risk. A higher score generally indicates lower risk, potentially leading to more favorable terms on loans and other financial products. A lower score might result in higher interest rates or denial of credit.

Credit scores are calculated based on information within your credit reports. FICO and VantageScore are primary scoring models that analyze your credit history to predict repayment likelihood. These models consider active accounts, total debt levels, and repayment history.

Key Factors Influencing Credit Scores

Credit scores are determined by several factors, each carrying a different weight. Payment history is the most significant component, typically accounting for about 35% of a FICO Score. Consistently making on-time payments demonstrates financial reliability, while late payments, even by 30 days, can negatively affect your score.

The amount owed, also known as credit utilization, is another substantial factor, often making up around 30% of your score. This ratio compares the total amount of credit you are using against your total available credit. Lenders generally prefer a lower utilization ratio, with many experts suggesting keeping it below 30%, and ideally under 10%, to positively impact your score.

Length of credit history contributes approximately 15% to your FICO Score. This factor considers the age of your oldest account, newest account, and the average age of all your accounts. A longer history of responsible credit management is viewed favorably.

Your credit mix, referring to the different types of credit accounts you have, accounts for about 10% of your score. This includes a combination of installment loans, such as mortgages or auto loans, and revolving credit, like credit cards. Demonstrating the ability to manage various types of credit responsibly can be beneficial.

New credit, including recent applications and newly opened accounts, makes up the remaining 10% of your score. Each time you apply for new credit, a hard inquiry is typically placed on your credit report, which can cause a small, temporary dip in your score, usually less than five points. Opening multiple new accounts in a short period might signal higher risk, especially for individuals with limited credit history.

How Credit Card Inactivity Affects Scores

Prolonged credit card inactivity can have unintended consequences for your credit score. Issuers may close accounts unused for an extended period, which can be as short as a few months or as long as two to three years.

If an inactive account is closed, it can impact your credit utilization ratio. Closing an account reduces your total available credit. For example, if you have a total credit limit of $10,000 across multiple cards and one with a $5,000 limit is closed, your total available credit drops to $5,000. If you carry a $1,000 balance, your utilization jumps from 10% to 20%, potentially lowering your score.

Closing an old, unused credit card can also affect the length of your credit history. The average age of your accounts is a component of your credit score. Losing an older account can shorten this average, especially if it was one of your oldest lines of credit. While a closed account can remain on your credit report for up to 10 years, its closure can still reduce the average age over time.

An inactive credit card does not contribute to a positive payment history. Payment history is the most influential factor in credit scoring. Regularly demonstrating responsible use by making timely payments is important for building and maintaining a good score.

Strategic Credit Card Use for Score Improvement

Using credit cards strategically can improve and maintain a healthy credit score. One effective approach is to make small, regular purchases and pay the full balance before the due date each month. This generates a consistent record of on-time payments, which is the most impactful factor in your credit score.

Maintaining a low credit utilization ratio is another strategy. Aim to keep your total credit card balances well below 30% of your total available credit, with an ideal target of under 10%. Paying down balances before the statement closing date can help ensure a low reported utilization.

Always pay at least the minimum amount due by the payment due date. Setting up automatic payments can help prevent missed due dates, which can significantly harm your credit score. Even one late payment reported to the credit bureaus can have a lasting negative effect.

It is beneficial to keep older credit accounts open, even if used infrequently. Older accounts contribute to a longer average length of credit history, a positive factor in credit scoring. Closing an old account, especially one with a significant credit limit, can negatively impact both your credit utilization and the average age of your accounts.

Regularly monitoring your credit reports for accuracy is important. You are entitled to a free copy of your credit report from each of the three major nationwide credit bureaus annually. Reviewing these reports helps identify and dispute any errors that could negatively affect your score.