Keeping a credit card in your wallet for emergencies is one thing, but if you never actually get around to using that card, you could be doing more damage than good. To keep your credit score healthy, it's vital to keep your credit cards open and active. Not only will occasional spending keep the credit available for use, but it'll also ensure your credit card provider reports your activity to the credit bureaus - something that's crucial if you're looking to build and maintain your credit score. Here, we look at exactly how often you should be using your credit card to keep it active, how to manage spending across multiple credit cards, and what the possible repercussions are if your account is closed due to inactivity.
How Often Should You Use Your Credit Card to Keep it Active?
The phrase 'use it or lose it' applies to more situations than you might think. Take your credit card. If you don't regularly use the line of credit that's been extended via the card, you may ultimately end up losing it. Credit card issuers only make money if their customers actually use their cards and accrue interest as a result. As CreditCards.com notes, if you don't use their card, the issuer would prefer to close the account and extend that same credit line to someone who actually will. Ultimately, credit card issuers only have a set amount of money to lend: if they lend it to someone who doesn't use it in ways that are profitable for them, there's only so long they'll allow the situation to continue unchecked. As a general guideline, you should use your card at least once every three months to avoid action. However, inactivity policies vary according to the card issuer. Most will allow around 90 days of inactivity, but some will allow it to continue for as much as two years. If you're in any doubt, the best thing to do is to contact your card issuer directly. They should then be able to advise you on how long they'll support inactivity before freezing or closing the account.
Why You Should Keep Your Credit Card Active
If you don't regularly use your credit card, you might think it's a good idea to simply close your account. But in fact, there are multiple benefits to keeping your account open through regular use, the most important being activity reporting. By keeping your account active, you'll ensure that the issuer reports on your activity to the credit bureaus. The more on-time payments you make, the better your credit score. If you have multiple credit cards, it's better to juggle small purchases between them to ensure each issuer reports your activity favorably. Making regular, on-time payments accounts for a good percentage of how your credit score is calculated - 35% in fact. But there are other factors involved. Credit utilization - the amount of available credit you've borrowed against - carries almost as much weight at 30%. If you lose a credit line because of inactivity or because you actively choose to close an account, you might unwittingly dent your credit score, depending on the balances you have on other cards. As the age of accounts is also a factor in your credit score (accounting for 15% in total), you might see it drop even further if the closed account was one of the oldest on your history.
How To Maintain Activity Across Multiple Accounts
As Go Clean Credit advises, credit card companies will typically either charge you a fee or slash your line of credit if you don't use a card regularly. Even if they stop short of closing your account completely, those two options are best avoided. If you have multiple credit cards, it's best to juggle small purchases between them before paying off the balance in full at the end of each month. This will avoid a 'no activity' mark on your credit score for each month you don't use a card with zero balance.
Before a credit card issuer closes your account for inactivity, they may send you several warning letters asking you to begin using it. However, this doesn't apply to all credit card providers. As The Balance warns, some credit card issuers will only send you a notice after your account has been closed, rather than in advance. Similarly, they may not let you know that an inactive credit card is no longer being reported to the credit bureaus. If you're not sure if your credit card is still active, you can either try making a purchase against it or contact your credit card issuer directly.
Charges For Inactivity
Whether or not you'll be charged for inactivity will depend on your issuer and the steps they take in response to the inactivity. Some will apply charges or reduce your credit card limit to protect their interests. Others will simply close your account so they can extend the credit line elsewhere. Some issuers, on the other hand, may encourage you to use the card via limited time offers such as 0 APR periods.
Considerations Before Closing an Account
If you have multiple credit cards that you don't use and are struggling to keep them in rotation, it may be wise to simply close some off, especially if you're paying high annual fees. However, it's important to bear in mind that in the short term, this can have a negative impact on your credit score. As mentioned previously, credit utilization accounts for the second biggest factor in determining your overall credit score. By closing accounts, you'll reduce your available credit and negatively impact your credit utilization score. If you do choose to close any accounts, it's better to cancel newer cards with lower credit limits while maintaining any older accounts with greater lines of credit. Also, remember to consider the kind of rewards you get with each card - if you have two accounts will similar histories and credit limits, maintain the one that offers the most beneficial rewards and charges the lowest annual fee. To minimize damage to your credit score, avoid closing cards with balances. In the long term, it will be more beneficial to transfer the balance onto a card with better terms before then closing it.
Written by Allen Lee
Read more posts by Allen Lee