Is It Bad to Have a Credit Card and Not Use It?

Many individuals have a credit card they rarely use, prompting questions about its financial implications. Deciding whether to keep or close such an account is not always straightforward. Understanding how an unused credit card affects personal finance requires a look into its potential benefits and drawbacks.

Impact on Your Credit Score

An unused credit card can help maintain a healthy credit score. A significant factor is the credit utilization ratio, which compares the total amount of credit you are using to your total available credit. An open, unused card contributes to your overall available credit, helping keep this ratio low, even if you are actively using other cards. For example, if you have a total credit limit of $10,000 across all cards and only use $1,000, your utilization is 10%, which is generally viewed positively by credit bureaus.

The length of your credit history also influences your credit score. Older accounts are beneficial, and keeping an older, unused card open contributes to the average age of all your credit accounts. Closing such an account could reduce your overall average credit age, potentially impacting your score, especially if it is one of your oldest credit lines.

A diverse credit mix, which includes different types of credit like revolving accounts (credit cards) and installment loans, can be seen favorably by credit scoring models. An unused credit card contributes to this mix, demonstrating your ability to manage various forms of credit responsibly. The impact of credit mix is typically less significant than credit utilization or payment history.

Closing an old, unused credit card can have negative consequences on your credit score. When an account is closed, its credit limit is no longer considered part of your total available credit, which can cause your credit utilization ratio to increase. For instance, if you close a card with a $5,000 limit, and your current balance on other cards remains the same, your utilization ratio could jump, signaling higher risk to lenders. Additionally, closing an older account shortens the average age of your credit history, which can also lead to a decrease in your credit score.

Other Practical Considerations

Some credit cards come with annual fees, which can range from basic to premium. These fees are charged regardless of whether the card is used, and they can erode any perceived benefit of keeping the account open. Review your card’s terms to identify any recurring charges.

Card issuers may have policies regarding account inactivity. If a credit card remains unused for an extended period, the issuer might close the account. They often do this because inactive accounts do not generate revenue from transaction fees or interest. Account closure due to inactivity may not always trigger a notification.

There is a risk of unnoticed fraudulent activity on an unused card. If you are not regularly checking the statements for an inactive account, unauthorized charges could go undetected. Consistently monitoring all financial accounts, whether active or not, is important to safeguard against potential fraud. Regular review of statements helps ensure that all transactions are legitimate.

Deciding Whether to Keep or Close

When evaluating whether to keep or close an unused credit card, consider its age and associated fees. Older cards without an annual fee are generally good candidates to keep open, as they positively influence your credit history and do not incur ongoing costs. A high credit limit on an unused card can also be beneficial by contributing to a favorable credit utilization ratio.

Conversely, consider closing cards that come with high annual fees, especially if the benefits do not outweigh the cost. Cards that are relatively new or have a low credit limit might also be less impactful to your credit score if closed, as their removal would have a minimal effect on your average credit age or overall available credit. If you have multiple cards with similar features, consolidating by closing less beneficial ones can simplify your financial management.

An alternative to outright closure is to occasionally use the card for a small, recurring expense, such as a streaming service subscription or a monthly utility bill. Setting up an automatic payment for this small charge and then immediately paying off the balance keeps the account active without accruing debt or risking late payments. This strategy helps maintain the positive credit impacts of the card. Regardless of your decision, regularly reviewing your credit report and statements for all accounts, active or inactive, remains a sound financial practice.