What Happens If I Don’t Use a Credit Card?
Learn the nuanced implications of an unused credit card. Understand its effects on your financial standing and how to best manage inactive accounts.
Having a credit card but not actively using it is common. Maintaining an unused credit card involves considerations that influence your financial standing. Understanding these implications is important for managing your credit health and making informed decisions about your accounts. This article explores the effects of credit card inactivity, actions card issuers may take, and strategic financial considerations.
Impact on Your Credit Profile
An unused credit card can influence your credit profile, especially your credit utilization ratio. This ratio measures the amount of credit you are using compared to your total available credit. It is a major factor in credit scoring models, accounting for approximately 30% of your FICO score and 20% of your VantageScore. Keeping an unused card open contributes to your overall available credit, which helps maintain a low credit utilization ratio, ideally below 30%. If the unused card is closed, your total available credit decreases, potentially raising your utilization ratio and negatively affecting your credit score.
The length of your credit history also plays a role in your credit score, accounting for about 15% of your FICO score. Older, unused accounts contribute to the average age of your credit accounts, demonstrating a long history of managing credit. If an old, unused card is closed, it can shorten the average age of your credit history. This might negatively impact your score, especially if you have a limited credit history. Closed accounts can remain on your credit report for up to 10 years, but their impact on the average age of accounts diminishes over time.
Maintaining an unused credit card can contribute positively to your credit mix, the variety of credit accounts you manage. A diverse credit mix, including revolving accounts like credit cards and installment loans, signals to lenders that you can responsibly handle various types of debt. While not the most significant factor, credit mix still makes up about 10% of your FICO score. If an unused card has an annual fee or other charges, failing to pay these can result in missed payments, which are highly detrimental to your credit score.
Card Issuer Actions
Credit card issuers monitor account activity and may take action if a card remains unused for an extended period. A common action is account closure due to inactivity. The timeframe for such closures varies by issuer, ranging from six months to three years of inactivity. Issuers may close accounts because they generate no revenue from inactive cards through transaction fees or interest. They might also reallocate the credit line to other customers.
Credit card companies are not required to provide advance notice before closing an account due to inactivity. While the Credit Card Act of 2009 mandates 45 days’ notice for major changes to account terms, courts have determined that account cancellation due to inactivity does not fall under this requirement. A cardholder might only discover the closure when attempting to use the card or reviewing their credit report.
Inactivity fees are no longer permitted on credit cards in the United States. The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 made it illegal for credit card issuers to charge dormancy or inactivity fees. However, annual fees continue to apply regardless of whether the card is used. If a card has an annual fee, this fee must still be paid to avoid late payment penalties and potential damage to your credit score. Not using a rewards card also means missing out on potential points, miles, or cashback.
Strategic Financial Considerations
Strategic financial considerations can help determine the best course of action for individuals with an unused credit card. An unused credit card, particularly one with a high credit limit and no annual fee, can serve as an emergency financial plan component. It provides access to a line of credit for unexpected expenses, acting as a financial safety net when immediate cash is unavailable. However, relying solely on a credit card for emergencies can lead to high-interest debt if the balance is not paid quickly.
Maintaining a healthy credit profile benefits from keeping older, unused cards open. These accounts contribute to a longer average credit history and a lower credit utilization ratio, both favorable for credit scores. To prevent an issuer from closing an account due to inactivity, make small, infrequent purchases, such as a streaming service subscription or a minor bill payment. Then, pay the balance in full immediately. This demonstrates ongoing activity and responsible use without incurring interest or accumulating debt.
Despite the benefits of keeping an unused card open, closing the account might be advisable in some situations. If the card carries a high annual fee that outweighs any benefits, or if the temptation to overspend is a concern, closure could be a prudent choice. If you have numerous open credit accounts, consolidating by closing some unused cards might simplify financial management. When considering closure, be aware of the potential impact on your credit score, particularly if it is an older account or one that significantly contributes to your overall available credit.