Keeping a credit card in your wallet for emergencies is one thing, but if you never actually get around to using that card, you may be doing more damage than good. To keep your credit score healthy, it’s fundamental 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 towards the credit bureaus – something that’s crucial if you’re looking to build and maintain your credit score. Here, we glance at exactly how often you ought to be using your credit card to keep it active, how to manage spending across multiple credit cards, and what the possible repercussions are in case your account is closed because of inactivity.
How Often Should You Use Your Charge card to Keep it Active?
The phrase ‘utilize it or lose it’ applies to more situations than you may think. Take your credit card. If you don’t regularly use the line of credit that’s been extended through the card, you may ultimately wind up losing it. Credit card issuers only earn money if their customers actually use their cards and accrue interest as a result. As CreditCards.com notes, should you don’t use their card, the issuer would prefer to close the account and extend that very 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 utilize it in ways that are profitable for them, there’s only so long they’ll permit the situation to continue unchecked. As a general guideline, you should use your card at least one time every three months to avoid action. However, inactivity policies vary according to the card issuer. Most will allow around 3 months of inactivity, but some allows it to continue for as almost as much ast two years. If you’re in almost 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 need to 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 crucial being activity reporting. By keeping your account active, you’ll be sure that the issuer reports on your activity to the credit bureaus. The more on-time payments you are making, the better your credit score. If you have multiple charge cards, it’s better to juggle small purchases between them to ensure each issuer reports your activity favorably. Making regular, on-time payments makes up about 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 since you actively choose to close an account, you might unwittingly dent your credit score, depending on the balances you have on other cards. Because the age of accounts is also a factor in your credit score (accounting for 15% in total), you may see it drop even further when 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 issuers will typically either ask you for a fee or slash your line of credit if you don’t use a card regularly. Even when they stop short of closing your bank account completely, those two options are best avoided. For those who have multiple credit cards, it’s best to juggle small purchases between them before paying off the balance entirely at the end of each month. This will avoid a ‘no activity’ mark in your credit score for each month you don’t make use of 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. Because the Balance warns, some credit card issuers will only send you a notice after your bank account has been closed, rather than ahead of time. Similarly, they may not let you know that an inactive credit card is no longer being reported to the credit bureaus. If you’re unsure if your credit card is still active, you can either try making a purchase against it or speak to 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 consume response to the inactivity. Some will apply charges or lower your credit card limit to protect their interests. Others only will 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've 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, particularly 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 stated previously, credit utilization accounts for the second biggest factor in determining your overall credit score. By closing accounts, you’ll lower your available credit and negatively impact your credit utilization score. Should you choose choose to close any accounts, it’s better to cancel newer cards with lower credit limits while keeping any older accounts with greater lines of credit. Also, remember to consider the type of rewards you get with each card – if you have two accounts will similar histories and credit limits, keep up with 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.