Can an inactive credit cards actually hurt your credit score?
Some people would say no. After all, if you aren’t using your credit card and therefore aren’t accumulating any interest that needs to be paid—which would lead to bad credit, if you are behind on payments—then why would not using your credit card have any sort of negative effect on your credit score? But more recently, some internet and television financial specialists have given reports indicating that not using your credit card actually hurts your credit report. Their reports are, for the most part, not entirely true. However, there is some truth to them. Inactivity on your credit card account can have a negative effect on your credit score. It is, however, an indirect effect that is usually negligible—but not always. It is important to know how anything can affect your credit score, so we will break down the basics of account inactivity and your credit score more in depth.
First, let’s determine how a credit report would determine whether or not your credit card account is inactive or active.
Credit reports are not chronological in nature. They do not take into account the chronology of your credit card use or balance. For example: Let’s say that your credit report for this month says that your credit card account has a balance of zero. Because credit reports are only issued monthly, it’s impossible to tell whether or not an account is currently active, meaning that you could have used the card after the cutoff date for the monthly report. Credit reports, because they are not always accurate measurements of activity, do not have a negative or positive effect on your credit score, as determined by most credit scoring models.
So, where does the effect of inactivity come in?
If you stop using your credit card for any reason, the credit card issuer will lose their source of revenue from you. If you don’t swipe your card, you can’t be change swipe or interchange fees. If you don’t use your card, you don’t generate any interest which is a source of revenue for the issuer. If you do not use your credit card for a significant amount of time, the issuer will eventually close your credit card account. And this is what would have an impact on your credit score.
If an issuer closes your account, you lose all of the value of whatever your credit limit was for that account. If the credit limit was low, such as the credit limit for a retail store, then the impact will likely be very low and essentially meaningless. Likewise, if you don’t have any credit card debt from another card, the impact will be insignificant. However, if the credit card limit in the card was very high or you have credit card debt from other cards issued to you, this can have a significant impact on your credit score. The key to avoiding this is simply to use your card from time to time to keep your account active.
The impact of credit card inactivity on your credit score comes from a different source: the credit card issuer.
When you don’t use your credit card, you are causing a drop in revenue for the issuer of your credit card. This is because they are losing revenue from any usage fees associated with your card as well as any interest you would have accrued by using your credit card. When your account is inactive for a significant period of time, the card issuer will usually close your credit card account. This closure is what can have a negative impact on your credit score, though how much of an impact will depend on two variables: current credit card debt and your card’s limit.
If your closed account had a low limit or you have no credit card debt, then the impact on your credit score is basically unnoticeable. But if your closed account had a very high limit or you have credit card debt on other accounts, the impact can be significant. To prevent this, all you have to do is use your credit card every once in a while to make sure your account is not closed for inactivity.