What Happens When a Credit Card Is Closed Due to Inactivity?
Understand why inactive credit cards close, their impact on your credit, and how to manage your accounts effectively.
Credit card issuers may close accounts that remain unused for an extended period, a practice known as inactivity closure. This action can have implications for cardholders, particularly concerning their credit profile. Understanding the reasons behind such closures and their potential effects can help individuals manage their credit effectively.
Reasons for Inactivity Closures
Credit card issuers close accounts due to inactivity for various business considerations. Maintaining inactive accounts incurs operational costs for banks, including expenses related to system maintenance, data storage, and statement generation. Issuers also consider the potential for fraud, as dormant accounts might be more susceptible to unauthorized activity if not actively monitored.
Inactive accounts do not generate revenue for the issuer through interchange fees, which are charges collected from merchants when a card is used for a purchase, or through interest if no balance is carried. Issuers may also reallocate unused credit lines to other customers who are actively seeking or using credit, optimizing their portfolio and maximizing profitability. The specific period of inactivity that triggers a closure can vary significantly among issuers, ranging from several months to a year or more.
Impact on Credit
A credit card closure due to inactivity can influence a credit score through several factors, though it is not considered a negative mark like a missed payment. One significant impact relates to the credit utilization ratio, which is the amount of credit used compared to the total available credit. When an account closes, the total available credit decreases, which can cause the utilization ratio to increase if balances exist on other active cards. For example, if a consumer has $10,000 in available credit and uses $3,000, their utilization is 30%; if an unused card with a $2,000 limit closes, their available credit drops to $8,000, and the $3,000 balance now represents approximately 37.5% utilization.
The average age of accounts also plays a role in credit scoring models. Closing an older, established credit card can reduce the average age of a credit history, potentially lowering the score, especially if it was one of the oldest accounts. Conversely, if a recently opened card closes, the impact on average age may be minimal. The number of open accounts and the diversity of credit types can also be considered. Having fewer open accounts or a less varied credit mix might indirectly affect a credit score.
Avoiding Account Closure
Cardholders can proactively prevent their credit card accounts from being closed due to inactivity by demonstrating regular activity. Making small, occasional purchases is often sufficient to keep an account active. This could include a recurring charge for a streaming service, a small online purchase, or a single purchase at a local store every few months.
After making a purchase, pay off the balance immediately to avoid interest charges and maintain low credit utilization. Setting up a small, recurring bill, such as a utility or subscription service, on the card and enabling automatic payments can ensure consistent activity without manual intervention. While some issuers may provide a warning before closing an inactive account, this is not universally required, so proactive measures are recommended.
Steps After Closure
If a credit card account has already been closed due to inactivity, several steps can be taken. The first action involves contacting the credit card issuer directly to confirm the closure and inquire about the possibility of reactivation. While issuers are not obligated to reopen accounts, some may consider reinstatement, particularly if the account was in good standing prior to closure. Be prepared to provide identifying information such as your account number and name.
It is also important to monitor your credit report to ensure the closure is accurately reflected and to assess its effect on your credit profile. Credit reports are available annually for free from each of the three nationwide credit bureaus. If the account cannot be reinstated, focus on maintaining good credit habits with remaining active accounts. This includes making all payments on time and keeping credit utilization ratios low across your active credit lines. These practices can help mitigate any negative impact and support a healthy credit score over time.