Those who struggle with debt may find it tempting to do away with using credit cards altogether. If you pay your credit card bills on time each month, you can establish a solid credit rating. If your rating has gone down due to debt issues, it can also be re-strengthened by clearing off your balance and paying your accounts responsibly.
However, as we explained in a previous article, doing so can negatively impact your credit, as these accounts strengthen your credit rating. The story explained ways responsible credit card use can positively impact your credit, but if you have old credit cards that haven’t been touched or used in years, does it affect your credit in a negative way?
Account inactivity, as in, having one or more dormant credit cards, can impact your credit reports and credit scores — however, it would be indirectly. It all comes down to your revolving credit utilization percentage, which we will explain later on.
Does credit card inactivity directly impact your credit?
Essentially, credit scoring models are not impacted positively or negatively by your past usage activity, because credit reporting is flat, meaning that your credit reports have no chronology of balances. In essence, your credit reports merely show a snapshot of what your credit history looks like.
Because of this, it is difficult to determine whether an account of yours is active, or inactive. Since a credit report doesn’t give enough data to determine activity, credit scoring models are not impacted by past usage activity.
What can impact your credit is the credit card issuer’s reaction to your inactive usage patterns, which can make its way into your credit reports and threaten your credit.
Why inactivity matters
If you have a credit card that you’re not using, and haven’t been using for a while, the revenue for the issuer generated by your card equates to nothing. If your balance is $0, and there’s no annual fee on your card, the card issuer isn’t making money.
Banks receive swipe fees, also known as interchange fees, paid by merchants every time a customer uses a credit card as payment. If your card is sitting at home in your sock drawer, it’s not being used and the card issuer isn’t being paid.
In addition to not making any money for the card issuer, you’re actually costing them money. Credit card issuers pay the cost of maintaining every customer’s account in their systems, so your inactive account is actually creating a dip in their revenue under the $0 point. Eventually your issuer will give up and close your account.
The bottom line: where you’ll be hit
When your card issuer closes your inactive account, you will immediately lose the value of the unused credit limit on your old card. What this means is that your revolving utilization percentage could go up. How high it can go depends on a couple of factors.
If you have heavy credit card debt on your remaining cards, the impact of an account closing might be significant to your credit. If the credit limit of the closed account was high, this is likely to strongly impact your credit as well.
If the limit on the card was low (for example, on a retail store card), and your credit card debt is low, the impact is likely to be virtually meaningless.
It’s best to have a lot of available credit and a low debt, as this is the best ratio for a good credit score. If you have a few cards that you’re not using, consider breaking them out again, even for just one or two purchases a month. Your card issuer will be generating revenue from your account, and you’ll kickstart your activity again.
If you’re a responsible credit card user, swiping your unused cards modestly will keep its inactivity from harming your credit, and your card issuer will be satisfied with maintaining your account.