What Happens If You Don’t Use Your Credit Card?
Uncover the true financial implications of keeping a credit card dormant. It's more than just a zero balance.
Credit cards serve as a common financial tool, offering convenience for purchases and a means to manage expenses. While many individuals actively use their credit cards, some accounts may remain dormant for extended periods. Understanding the implications of not using a credit card is important, as it can lead to various outcomes that affect one’s financial standing. This article details the potential outcomes when a credit card account is left inactive.
How Your Credit Score is Affected
Not using a credit card can influence a consumer’s credit score through credit utilization, length of credit history, and credit mix. Credit utilization, a significant portion of a credit score, measures credit used against total available credit across all revolving accounts. Maintaining a low utilization ratio, generally below 30%, is beneficial for credit scores. An unused credit card with a high limit positively contributes to this ratio by increasing total available credit, even if the balance remains at zero. If this account closes, total available credit decreases, which can raise the utilization ratio and lower the credit score.
The length of credit history also plays a role in credit scoring, accounting for a percentage of the score. This factor considers the average age of all credit accounts and the age of the oldest account. An old, unused credit card positively contributes to the average age of accounts, demonstrating a long credit history. If such an account closes, especially if it is one of the oldest, it could shorten the average length of credit history, negatively affecting the credit score.
Credit mix, the variety of credit accounts, is another factor in credit scoring models. A diverse mix, including revolving accounts like credit cards and installment loans, indicates responsible debt management. If an unused credit card is the only or primary revolving account, its closure could affect credit mix diversity, impacting the credit score. While credit mix typically has a smaller impact than other factors, its contribution can still be meaningful for overall credit health.
Account Closure Due to Inactivity
Credit card issuers may close accounts inactive for typically one to three years. Issuers close accounts due to maintenance costs and to mitigate potential financial risks. Dormant accounts do not generate revenue from transaction fees. An unused account also poses a risk if a cardholder suddenly incurs significant debt after non-use, especially if their financial situation changed.
Credit card companies are generally not required to provide advance notice before closing an account due to inactivity. Federal regulations do not mandate notification for inactivity-based closures. Cardholders may only discover closure when attempting to use the card or reviewing their credit report.
The closure of an inactive account has direct consequences. Closure reduces total available credit, which can increase the credit utilization ratio across remaining active accounts, negatively affecting the credit score. While a closed account in good standing may remain on a credit report for up to 10 years, its eventual removal can shorten the average length of credit history, especially if it was an older account.
Other Financial Considerations
Not using a credit card can lead to other financial considerations beyond credit score impacts. Some credit cards carry annual fees charged regardless of usage. These fees are typically billed annually and must be paid to keep the account in good standing. An unused card with an annual fee still obligates the cardholder to pay, incurring costs without direct benefit from features or rewards.
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 largely banned inactivity fees for credit cards. Cardholders generally will not face a specific fee for not using their credit card. However, the absence of an inactivity fee does not prevent issuers from closing accounts due to inactivity.
Leaving a credit card dormant means missing out on potential rewards. Many credit cards offer benefits like cashback, travel points, or other loyalty rewards for purchases. When a card is not used, these opportunities are forgone. Accumulated rewards may have expiration dates or could be forfeited if the account is closed by the issuer or cardholder.