KEY POINTS
If you are a holder of several of those tempting colorful plastic cards, you might as well want to keep a few of them into a drawer and stop using them for a while. Although, keeping away one or two credit cards out of your sight can be a good idea to stay out of debt. But neglecting a credit card for a long period can pose certain risks. There are primarily two downsides for such an act: your lender might deactivate the account, and there will be a threat of fraudulent activities if you do not stay cautious about keeping a track on the inactive card.
Susceptibility to Fraud
The most perilous risk about not using a card is that you may end up turning a blind eye towards fraudulent activities concerning the card. Thus, the more cards you have, the more vulnerable you become to trickery and unfair practices. For example, if you have four cards, and you stop using one or two, it is most likely that you may end up forgetting about the cards, especially when you receive online statements instead of paper statements. The fraudulent practices may continue for months without you realizing until it is too late. Hence, it is very important to pay attention and stay vigilant.
The risk of getting Account Deactivated
The other concern of avoiding the credit card is that your lender might close your account. Lenders have the right to close your account for a variety of reasons:
One reason could be that if you do not use your account at all and they do not hear from you, the lack of information may persuade them to close your account.
If you choose to keep your card aside for a very long period, it may not affect your credit score. However, if a lender takes notice of the longtime of inactivity and closes your account, then your score can take a slump. That is because not having a source of credit impacts the credit utilization ratio- a calculation of how much credit you use in relation to the total available credit.
Two of the most important factors for estimating your FICO score is credit history and credit utilization ratio. The lower the credit utilization ratio, the higher the credit score will be.
How credit score gets affected due to the lender’s decision to close an account?
To understand this mechanism, let’s take an example- suppose you have $20,000 of available credit that is distributed across four credit cards. Each card allows you to charge up to $5,000, but you only use three cards, leaving the fourth one totally inactive. If you charge a total of $4,000 across all of those cards, your credit utilization ratio will be 20%.
Now, think of a scenario where lender notices that you have stopped using the fourth card and finally decides to deactivate the account, immediately that line of credit will no more be a part of that ratio. In the absence of the fourth card, you will be left with $4,000 worth of changes against a total of $15,000 in available credit distributed among three cards. This will bring up your credit utilization ratio to 27%, very close to the mark that can sabotage your FICO score.
It is extremely important to keep your credit utilization ratio below 30%. A ratio of 30% and more implies that you spend way too much and hence, impact your credit score.
How promptly will a lender deactivate an inoperative credit card account?
No longer using a card regularly does not necessarily mean that your account will get closed. But remember, the ultimate decision is made by a lender to close an inactive account. There are no hard and fast standards or rules as to when a lender decides to shut your account from the day of inactivity. Some companies might shut down your account just after the six months of inactivity and others will keep requesting you to use their cards without taking any action.
In a situation when a lender is about to close your account, he might send you a warning letter before acting upon his decision. While that keeps you informed and gives you time to settle down the matter with the lender, however, if such letters are emailed, it is very easy to skip or miss them.
How to keep your account active?
Thus, the best way to keep your account open is to keep using your card occasionally. The key solution lies in striking a balance by not using the card too much or too little. The most convenient way to keep the card subtly active is by making single or regular payments through the card. For example, using the card to pay the monthly electricity bill or phone bill.
Activate some kind of automated charge on the cards that are not being used. It will keep the activity occurring.
Do not want to close the account? Here’s what you can do
If you are no longer using a credit card but still do not want to close your account due to probable impact on credit score, you can consider the following choices:
Call the lender and ask him to change to the card that fits you better. Go for a card with lesser charges.
As mentioned above, keep using your card for small transactions or consider activating calendar reminders so you do not miss out on any payment meant to be done through that particular card.
Apply for a card that best fulfills your need along with a high credit limit so that you can replace it with the unused card without affecting your credit score.
Also, there are certain credit cards that you can get rid of – unused Low-credit-limit cards, cards with undue charges, and fees.
Conclusion
Consumers like to have open credit cards that charge no annual fee, have a low rate of interest, or offer exciting rewards. The best possible alternative is to keep using the credit card on certain occasions to ensure it stays alive. How often or regularly you use it, is a matter of choice. To stay on the safer side, try to make payment using that card at least once in a month no matter how small your purchase is. The activity will get recorded in the monthly statement and also, the on-time payment of such expenditures will keep your credit score in check as well as encourage credit card companies to keep your account active.
The perfect way to make use of any credit card is to purchase things you need, enjoy valuable rewards, and never carry a balance into next month. Regardless of what your situation is, avoid credit card debt by all means, and do not stop using your card. Every financial tool is as worthy as you make it. Stay cautious and craft a plan that helps you achieve a financial picture you want.