We’ve all been there. After shopping and picking out a few items, you head to the counter, and the cashier tells you there is a special offer: You’ll get 20% off if you sign up for a credit card today. It sounds like a great deal, so you sign up to get the discount. Afraid of racking up interest charges, you pay it off right away, then never use the card again. It just sits in a drawer somewhere, gathering dust.
While you may think that minimizing your credit card balance is a smart financial decision, having unused credit cards can be a problem — and can impact your credit score.
Unused Cards and Your Credit Score
Having a range of cards and credit lines open indicates to lenders that you are a reliable borrower and helps improve your credit score. That unused card adds to your overall available credit, which is a good thing — but if it goes inactive for too long, it can negatively affect your credit history.
Your credit score is dependent on credit utilization, meaning the percentage of your available credit line you use each month. If your card goes unused, eventually the credit card company will assume you no longer want the account and will close it for you. Exactly how long this is varies from issuer to issuer and can depend on other factors in your credit history. Even worse, issuers are not required by law to inform you that the credit account has been closed due to inactivity. When the account is closed, the sudden decrease in your available credit raises your credit utilization and can cause your credit score to drop.
Beyond credit utilization, your credit score is also dependent on the length of your credit history. If the unused card is your oldest account, and it gets closed, you lose out on the benefits of your history and your score goes down because of that, as well.
Generally, you don’t want to close your oldest account, because once it’s eliminated, your credit history is abridged and your score will decrease.
When Does It Make Sense to Close a Card?
In some cases, it may make sense to close a dormant card rather than have it go unused. For example, a card with a high annual fee or a very high interest rate with a balance can cost you in the long run; it makes more sense to transfer the balance to a lower interest card and close the card with an annual fee. (See also: Best Credit Cards with No Annual Fee)
If you know you’re not going to use the cards anymore, you may want to close it on your terms rather than have it unexpectedly closed by the issuer. Do it during a time when you won’t need your credit checked. Definitely don’t go on a closing spree right before you’re applying for a loan or trying to rent a new apartment. In fact, the best time might be right after, since your credit will have already taken some hits with the new loan or credit checks anyway.
Preventing an Account Closure
To prevent an account closure and maintain your credit score, use the cards you want to keep for necessary expenditures. Rather than using only one credit card, spread out your purchases over all of your cards to ensure they all are used and stay active.
To prevent racking up credit card debt in the process, use your cards strategically. Use each card for a routine purchase, such as using one card for groceries and another for gas. After you make a purchase, make a payment right away. This process will keep your cards active but will ensure you do not build up credit card debt.
While it’s a good idea to keep your debt down, not using your cards can lead to a lower credit score and smaller credit line. Instead, manage your spending wisely to keep the cards active and maintain your credit history.