What Happens If You Don’t Use Your Credit Card?
Uncover the subtle effects of credit card inactivity on your financial standing and credit report. Understand the implications of leaving a card dormant.
Credit cards offer convenience and help build credit history. Many people have credit cards they rarely use, often for emergencies or specific purchases. Understanding the implications of keeping an inactive account open is important for personal finance management. This article explores the outcomes of not using a credit card.
How Inactivity Affects Your Credit Profile
A credit card’s active or inactive status influences your credit profile. An unused card contributes to your total available credit, a factor in your credit utilization ratio. If this card closes, that available credit is removed, potentially increasing your utilization ratio on other active cards. A higher utilization ratio can negatively affect credit scores.
The length of your credit history is another factor influenced by inactive cards. Keeping an old, unused card open contributes to the average age of all your credit accounts. This average age is a positive factor in credit scoring models, as it demonstrates a long-standing ability to manage credit. If an older card closes, it could shorten the average age of your accounts, which might negatively impact your credit score.
An unused card does not generate new payment history, a significant component of credit scores. However, it also avoids creating negative payment history, such as late payments. Any positive payment history from prior use remains on your credit report. Having a credit card, even if unused, contributes to a diversified credit mix, which is generally viewed favorably by credit scoring models.
Account Status and Issuer Actions
Credit card issuers may take action on accounts inactive for extended periods. They might close an account due to prolonged inactivity, as these accounts do not generate revenue from transaction fees or interest. The timeframe for an account to be deemed inactive and closed varies by issuer, commonly ranging from six months to three years. Issuers are not required to provide advance notice before closing an account due to inactivity.
When an issuer closes an account, the credit limit is removed from your total available credit. This reduction can increase your overall credit utilization ratio if you carry balances on other cards. The closed account remains on your credit report, but its closure can still affect the average age of your accounts, particularly if it was one of your oldest credit lines.
Annual fees generally continue to apply even if a credit card is not used. Some cards, especially those with premium rewards or benefits, carry annual fees regardless of activity. Review the card’s terms and conditions to understand any applicable fees.
Ongoing Responsibilities and Security
Even with an unused credit card, the cardholder retains responsibilities and should be aware of security considerations. Regularly checking statements for any unauthorized activity is important. This helps detect fraudulent charges or errors promptly. Financial institutions offer tools to alert cardholders to suspicious activity.
Keeping contact information updated with the card issuer is important. This ensures you receive important notices regarding the account, such as changes to terms, security alerts, or potential fraud notifications. Outdated contact details could lead to missed communications, delaying your response to critical account issues.
Even dormant accounts can be susceptible to data breaches. Maintaining vigilance over all accounts, including inactive ones, is a good security practice. If you close an account permanently, securely destroy the physical card to prevent misuse.