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Although it seems counter-intuitive, the fact is that if you do not use your credit cards, it can (indirectly) harm your FICO score. You might think it’s enough to have a few credit card accounts in your name, that you rarely or never use so that you have items on your credit report. However, if you leave your cards unused, you can find yourself slammed by your card issuer out of the blue – and your credit score can drop as a result. Here’s what you need to know.
Credit Card Issuers Expect You to Use the Plastic
First, as a card holder, you are a customer to the credit card issuer. However, if you don’t transact by swiping the card now and then, you’re not a good customer. Card issuers make money in a few different ways. One is if you carry balances month to month and they can charge you interest. Another is off fees like annual fees, over-limit and late payment fees.
But even if you pay your balance in full each month, never run late, and never go over the limit, your credit card provider can still make money off of you so long as you use your card. Stores, restaurants, and any business that allows you to use a credit card pay out a percentage of each sale for the privilege. But if you have no activity, there’s no profit and no incentive for them to stick with you.
Account Closures Can Come with No Notice
If you leave a card account fallow and don’t use it for an extended time, the credit card issuer can close the account without any prior notice. That document with the microscopic fine print that comes with your card and is labeled “terms and conditions” includes a list of a whole host of reasons the card issuer can suspend you as a customer and take back your charge privileges.
You will get a notification that your card account was closed but might not know ahead of time that it’s coming. If you have a pattern of not using your card, the issuer has no profit incentive to keep you on their customer roster, no matter how long you’ve been a card holder. Using your cards, even occasionally, goes a long way to convincing card issuers to keep you as a customer.
Losing an Older Account Lowers Average Age of Credit
Your credit score is a calculation based on several factors. One of these is the average age of credit. This is calculated as a simple average. You add up the numbers of years all your revolving credit lines have been open and divide it by the number of accounts you have. Let’s say you have five cards and the oldest has been open for 12 years, one for seven years, two for five years, and one for one year.
The average age is six years (12+7+5+5+1/5). If you aren’t using your oldest card and the issuer shuts the account, your average age drops to a little more than four (7+5+5+1/4). This can cause your credit score to take a dip even though none of your behavior has changed and you’re not any deeper in debt or delinquent on your obligations. Keeping older accounts open is advantageous.
Any Account Closure Can Wreck Your Utilization If You Carry Balances
Not only can an account closure drop your credit by reducing your average age of credit but it can also cause a major drop if you’re carrying a balance. For instance, if your oldest card has a higher rate of interest because your credit wasn’t as good when you got it, you might not use it. Then suppose you just had a big car repair and couldn’t pay it all off, so you’re carrying a balance.
If the five cards have a combined credit limit of $10,000 and you’re carrying a $2,500 car repair balance, you’re at 25% utilization (2500/10000=20%). Then say the oldest account is closed and it had a $3k credit limit. Note that your utilization is instantly higher at 36% (2500/7000=35.7%). That’s way too high, and your credit score can drop with no other changes to your credit profile.
When It's Okay to Close Accounts
Sometimes when you’re just starting out, you might obtain a credit card with a higher interest rate or an annual fee that you don’t like. If you’re a customer in good standing, you might be able to negotiate better terms and get rid of the annual fee or drop the interest rate. If you don’t carry a balance, the interest rate doesn’t really matter.
So long as you’re not carrying balances and closing the account won’t wreck your average age of credit, it’s no big deal, but be aware of the consequences before you close an account. To avoid having an account closed involuntary, you should use all your cards regularly. Consider setting up small recurring items, one to each card such as your cell bill, Netflix, etc. and then pay off in full each month.
To find out more about improving your credit after bankruptcy, contact Credit Score Keys. Call (844)659-3226 to set up a free consultation today to get your credit score on the right track.