How Credit Card Inactivity Impacts Your Credit Scores

The knee-jerk answer is, “it doesn’t,” but that leaves too much meat on the bone. Credit card inactivity CAN have an impact on your credit, but it would be indirect.

It’s strange, but from time to time, I get a small pop in the volume of the same question. It happened to me last week. I was asked four times on the same day about the impact of credit card account inactivity on your credit reports and credit scores. In this post, we’ll discuss what it means to have an inactive credit card, how credit card inactivity affects your credit score, and delve into some strategies for finding the right balance for your credit card usage.

For quick answers regarding credit card inactivity, use the links below to navigate to specific sections or read end to end for a greater scope on the subject.

• What is Credit Card Inactivity?
• How Long Can a Credit Card be Inactive Before Closing?
  • Why does my credit card issuer care if I use my card?
  • Will I be notified before my credit account is closed?
• How Does a Closed Account Impact Your Credit Score?
• Should I Cancel My Credit Card?
• Prevention is Key

What is Credit Card Inactivity?

Credit card inactivity is when your credit card has a zero balance over an extended period of time. The catch with credit card inactivity is that if you stop using your credit card for several months or years, your card issuer could decide to close your account, which could indirectly impact your credit score. We’ll discuss more about what happens when your credit card account is closed due to inactivity a little later on in this post.

It may seem pretty straightforward to determine whether your credit card is active or not, but credit reporting is very flat, meaning your credit reports only show you a snapshot in time of what your credit history looks like. There is no chronology of balances, which means it’s hard to determine from a credit report if an account is active or inactive.

For example, if you have a credit card with a $0 balance on a current copy of your credit report, it appears that the account is inactive. The problem is that the balance is from last month’s statement and the card may have been used since the last month’s statement was cut, thus the account is now “active.”

Because you can’t determine activity from a credit report, credit scoring models cannot be harmed or helped by your past usage activity. However, the credit card issuer’s reaction to your usage patterns can make its way to your credit reports, and that’s where the game changes. In other words, if your credit card issuer decides to close your account due to credit card inactivity, it could impact your credit score.

How Long Can a Credit Card be Inactive Before Closing?

It’s up to your credit card issuer! Some companies allow users to have a zero balance for a longer period of time, while others require you to maintain a certain balance. Before canceling your credit card or leaving your card open without a balance for too long, get in touch with your credit card company to see what their restrictions are.

Why does my credit card issuer care if I use my card?

If you choose to stop using your credit card account, for whatever reason, the revenue generated by that card dries up, unless that card has a balance or an annual fee. Your card issuer depends on your usage in order to make money. If your card has a $0 balance and no annual fee, then your card issuer won’t make any money from interchange fees (aka “swipe fees”). Add that to the absence of interest, and annual fees and the card becomes a drag to the issuer.

In fact, if there is no usage, no balance, no interchange fees, and no annual fee, then the card drops below the $0 mark on the revenue curve. Credit card issuers incur a cost to maintain your account in their systems. They pay the credit bureaus for periodic credit reports and scores on you as part of their account maintenance practices, along with time and energy spent trying to figure out how to get you active again.

There’s a cost to all of this, which is why you’re a “loss” while you’re inactive.

Will I be notified before my credit account is closed?

Sometimes. Credit card companies are not required to give account holders notice that their credit card account will be closed due to inactivity. However, they must give you 45 days notice when making major changes to your account, which could include closing as a result of inactivity.

How Does a Closed Account Impact Your Credit Score?

When a credit card issuer closes your account, your credit limit could be lowered due to inactivity, which translates to a decrease in available credit. This could also mean your revolving   percentage could go up, and it could go up a lot.

As you may know, your credit utilization is one of the many  , along with your credit history and age of credit, among other metrics.

How much impact does a closed card have on your credit score? The impact to your credit is going to vary based on a couple of factors. If you carry credit card debt on other cards, the impact could be significant. If the credit limit on the newly closed card was very high, the impact could be significant.

If the credit limit was very low (like on a retail store card) and you don’t have credit card debt elsewhere, the impact is likely to be less, because your utilization won’t shift much and your debt-to-income ratio is still relatively low.

Should I Cancel My Credit Card?

It depends. Each and every financial decision you make should be looked at through the lens of your lifestyle, financial situation, and personal preferences. Before canceling your credit card, you should consider what pros and cons you may see as a result.

Here are a few factors to think about before canceling an inactive credit card:

• Pro: Cancelling can save you money on annual fees, preventing extra, unnecessary expenses.
• Pro: Closing an inactive credit card account can help you simplify your finances and make it easier to focus on managing other debts while keeping your monthly budget on track.
• Con: Your credit card utilization may increase while your available credit decreases.
• Con: Closing a credit account could negatively impact your “credit mix,” which can alter your credit score.

Prevention is Key

If this is a concern for you and has you running to check your credit score, there’s a way to prevent all of this. All you have to do is use your credit card from time to time. Now, I’m not suggesting that you get into debt, nor am I suggesting that you use it to buy things you wouldn’t normally buy.

I’m suggesting that you buy a tank of gas or use it to pay this month’s cable bill, which are things you’re going to have to pay for anyway. This way, you’re killing two birds with one stone.

By using the card, and then paying it off immediately, you’re resetting the activity clock and it isn’t costing you a penny in interest. The credit card issuer is happy because they’re making revenue from the swipe fee, which is being paid by the merchant, not by you.

Best of all, you protect—and possibly even improve your credit—because the issuer isn’t likely to close your account if you use it from time to time, even on modest purchases.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.