What Happens If You Get a Credit Card and Don’t Use It?
Understand the full financial and practical scope of having a credit card you don't use. Get insights on managing inactive accounts.
It is common for individuals to obtain a credit card, perhaps for an introductory offer or as a financial safety net, only to find themselves not using it. This scenario, while seemingly harmless, carries various financial and practical implications. This article explores the consequences of maintaining an unused credit card, including effects on credit scores, fees, security, and management strategies.
Impact on Credit Score
An open credit card account, even if unused, can positively influence credit scores by contributing to a lower credit utilization ratio. This ratio, representing the amount of credit used relative to the total available credit, accounts for about 30 percent of a FICO score. Keeping an unused card open increases the overall available credit, which helps maintain a low utilization rate, especially if other cards carry balances.
The length of credit history also factors into credit scoring, making up about 15 percent of a FICO score. An older, unused card that remains open contributes to a longer average age of accounts, which is viewed favorably by credit scoring models. Therefore, simply not using a credit card does not inherently harm a credit score if the account stays open and in good standing.
However, the primary risk to a credit score from an unused card stems from the issuer closing the account due to inactivity. Credit card companies may close idle accounts because they generate no revenue from transaction fees or interest. Such a closure reduces the total available credit, which can cause the credit utilization ratio to increase, potentially leading to a decrease in the credit score.
Furthermore, if the closed card was one of the oldest accounts, its removal from the credit report can shorten the average age of the credit history, negatively impacting the score. Issuers might close an account after a period ranging from a few months to over a year of inactivity. Cardholders may not receive prior notification of account closure due to inactivity.
Potential Fees and Charges
The most common financial cost associated with an unused credit card is the annual fee. Many credit cards, particularly those offering premium rewards or benefits, charge a yearly fee regardless of whether the card is used. These fees can range from around $95 for rewards cards to over $500 for high-end options.
If a card with an annual fee remains unused, the fee still applies and must be paid. Failure to pay could lead to late payment fees and negative credit reporting.
Inactivity fees are largely prohibited for credit cards in the United States. The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 banned credit card issuers from charging fees solely for a lack of activity on an account.
Other types of fees, such as late payment fees or interest charges, are typically not a concern for a credit card that is never used and thus carries no balance. However, if a card had a previous balance or a small, forgotten charge, failure to pay it could result in these fees.
Security and Account Management
Even a credit card that remains in a drawer and goes unused can pose security risks. The card number can be compromised through data breaches. If compromised, fraudulent transactions could occur without the cardholder’s immediate knowledge, especially if statements are not regularly reviewed.
Credit card issuers retain the right to close accounts for prolonged inactivity. While the specific period of inactivity that triggers closure varies by issuer, it can range from several months to over a year.
Effective account management for an unused card involves securely storing the physical card. Cardholders should regularly monitor statements or online activity for any suspicious charges. Setting up online access and reminders to check the account monthly can help detect unauthorized activity promptly.
Strategic Non-Use and Alternatives
Maintaining a credit card primarily for emergencies is a common and strategic approach. Making a small, infrequent purchase, such as a streaming service subscription or a small retail item, every few months or at least once a year can signal activity to the issuer. Setting up a small recurring charge and then automating the payment in full can be an effortless way to keep the account active without incurring debt.
For individuals seeking to build credit without traditional credit card usage, several alternatives exist. Secured credit cards require a cash deposit as collateral, which often becomes the credit limit, making them accessible for those with limited credit history. These cards report payment activity to credit bureaus, aiding in credit score development.
Credit-builder loans offer another avenue; a small loan amount is held by the lender while the borrower makes regular payments, which are reported to credit bureaus. Additionally, becoming an authorized user on another person’s credit card or having timely rent and utility payments reported to credit bureaus can contribute to building a credit history.
If a credit card serves no purpose and carries an annual fee, downgrading to a no-annual-fee card or closing the account might be considered. While closing an account can potentially impact a credit score by increasing utilization or reducing the average age of accounts, the effect is often minor, especially if other active accounts exist.