Does Not Using a Credit Card Hurt Your Credit Score?
A credit card is one of the most used financial tools today. It allows people to make purchases, transfer money, and withdraw cash from ATMs using borrowed funds with regular repayments. When used wisely, credit cards help people build good credit scores, which enables them to apply for more funding easily. But what happens to your credit history and loan worthiness when you stop using your credit card? We will try to answer this and other related questions in this article.
Be Aware of Closing a Credit Card
Whether your credit score will be affected when you close a credit card depends on the provider of your line of credit. Lenders calculate your credit score in their own ways, which is why you do not have a single score from all of them and a borrower can have different credit scores. There are various credit rating systems in different countries. FICO and VantageScore are the most used in the United States. You can find more details about these scoring methods and all the factors they take into consideration in this post.
Better still, you can try to find the rating system used in your country. For instance, in Europe, the credit rating system varies from country to country. Nevertheless, there is a central record of borrowers who make late repayments and different credit bureaus like the Irish Credit Bureau (ICB) in the Republic of Ireland, Equifax and Experian in the United Kingdom, the Slovak Credit Bureau in Slovakia, and many others.
The lack of a single pan-European credit reporting agency is caused by the fact that many national bureaus were established before the EU existed. Many of them are under the supervision of a national or regional bank or group of banks.
Closing a credit card can have a negative or positive impact on your credit score, depending on your credit situation. It can lower the total credit you have compared to the amount you are using, and this refers to your debt-to-credit utilisation rate, which is used to calculate your credit score.
Also, closing a credit card can affect your credit history, which is one of the factors used to compute credit scores. Besides, creditors are interested in using your credit history to see whether you can handle debts properly.
Other relevant questions to be answered for credit card awareness include:
Can a card be closed due to inactivity?
Yes, it is possible for an inactive card to be closed. In that case, you will lose the available credit, which will further affect your credit utilisation ratio and reduce your credit score. Note that a card will be considered inactive after about a year or more of disuse. The card issuer will usually not inform the cardholder about account closure in the case of inactivity.
Can you close a credit card account that has a balance?
You can close a credit card account only if you are not owing any payments to the card issuer. Nevertheless, if you have a “balance transfer credit card” issued by another provider, you can move your available credit balance there. It is a fast way to pay off your debt.
How do you cancel an unused credit card?
Call the customer care line of the company that issued your card and ask to have your account cancelled. Make sure you are clear about what you want before contacting the representative because he or she will likely try to persuade you to keep the account open. A common strategy they use in response to account cancellation requests is to offer the customer lower rates or waive some fees.
What are the alternatives to closing a credit card?
There are other options for anyone who is not using a credit card but is unwilling to close it due to the potential negative effects it will have on their credit scores:
- Alternative 1: You may prevent the issuer from cancelling the card (due to inactivity) by keeping it open and making a minor recurring charge on it. To avoid missing a payment and damaging your credit score, think about using autopay or calendar reminders.
- Alternative 2: Request a switch to a more suitable card from the same issuer. You can do it via a call to the issuer. For instance, you can apply for a downgrade to a fee-free card with limited benefits.
- Alternative 3: Replace the credit limit on the card you don't use by applying for a card you do like and making sure that its credit limit can replace that of the previous one. When successful, cancel the unused credit card.
Will My Scores Be Hurt by Unused Credit Cards?
Even if you do not use your card frequently (or at all), it still influences two credit scoring factors: the duration of your credit history and your utilisation rate.
For instance, as much as 15% of a FICO score is determined by the length of the borrower’s credit history. This factor can be found in the credit scoring systems used in many countries. So, until you decide to close one or more accounts, this is probably the aspect of your overall score that you have very little control over. Both the age of your oldest account and the average age of all of your accounts are used to determine how long your credit history has been.
Unless you are an authorised user on someone else's previous account, there is no way to magically age your past while you are just getting started in the credit world. The age of the account on which you have been given permission to access will be sent to your file by FICO and VantageScore alike.
If you subsequently decide to cancel an old credit card account, the score for that account will still be used if it is still being reported. Your credit report will contain information on other closed accounts that are still in good standing for up to a decade.
Credit utilisation comprises about 30% of your FICO credit score, making it the second most significant component after payment history. Having access to credit and utilising it responsibly are vital for your score. Even a 0% usage rate won't do you much good. Why? Because if there was no usage factor to compute, there would be fewer data available for the score to use in determining your credit risk.
How can I Keep My Card Active and Not Hurt My Score?
The best way to keep an active card history without negatively affecting your credit score is to make transactions on it regularly. You can make small transactions once a month and pay off the debt in full before your due date. Alternatively, you can set up recurring automatic payments on your credit card, such as utility bills and Netflix subscriptions. This system comes with two benefits: it shows that you use credit responsibly and it saves you from paying any interest.
Tips on Efficient Credit Card Management
There are several things you need to know how to do if you want to manage your credit card smartly. Most importantly, you need to learn to read the terms and conditions that come with it and know how to go about fixing errors that may appear in your credit report.
How to read your credit card’s terms and conditions
Credit cards often come with attractive perks and rewards, but you should pay attention to the accompanying terms and conditions so as not to end up feeling tricked. Usually, information about pricing and terms and conditions can be found close to the credit card application link. Contact the issuer if you cannot find it.
Many countries require credit card issuers to inform their intending customers about the full details of the account before opening it for them. They are to disclose information like charges, fees, annual percentage rates (APR or interests), and grace periods with regards to payment. There are even responsible lending laws in place to oblige credit card issuers to provide these details and protect consumers. Examples of such laws are the “Truth in Lending Act” and the “Credit Card Accountability Responsibility and Disclosure Act” of the United States; the “Consumer Credit Act” of the United Kingdom; and the “Consumer Credit Directive” of the European Union.
So, the best way to read your credit card’s terms and conditions is to look for important information, such as the following:
- Annual interest rate (APR): This refers to the card’s APR range, which includes the:
- Introductory APR — for balance transfers.
- Penalty APR — for any compliance failure.
- Purchase APR — for overdue balances carried over from the previous month.
- And cash advance APR — for borrowing banknotes.
- Fees: This includes the annual fee, account maintenance fee, balance transfer fee, and other fees that the card issuer may charge you. The annual fee refers to the amount you pay for a card membership. Some issuers waive this fee in the first year and specify it in the terms and conditions.
- Bonuses: You need to also look for the bonuses that come with the credit card account. Possible examples include a sign-up or welcome bonus and the limits.
- Cashback: The earning rate, or cashback, is also worth looking out for when applying for a credit card. Try to know the type of purchase that will allow you to earn cashback.
- Redeeming rewards: Read the terms and conditions to find out how you can redeem any rewards on offer to customers. Also take note of information about the limitations, expiration, forfeiture, and cancellation of the rewards.
It goes without saying that misconceptions cannot entirely be prevented because terms and conditions are complex and unclear (and all the restrictions are not always spelt out). Nevertheless, you might be able to save yourself some disappointment by carefully reading the terms and conditions of the credit card and keeping an eye out for important details.
How to dispute and fix credit report errors
You could miss your next opportunity to purchase a car on credit or have your mortgage application approved if there is a significant error on your credit report. For example, there could be a name mix-up or incorrect personal details in your report. Hence, it is your responsibility to have any errors in your credit report corrected as soon as possible.
Below are a few steps you can follow to dispute and fix any serious errors on your credit report:
- Request for a free credit report: You can use this free service or any other platform available in your country to get a free annual credit report from major bureaus like Equifax, TransUnion, and Experian.
- Gather the supporting documents: When you find an error in your report, put together all the necessary documents to support your argument that there is a mistake. For example, you can attach a cancelled check.
- Write a clear and convincing letter: In your dispute letter, clearly state whatever content in your report you disagree with, give a justification for your dispute, include any supporting documentation, and ask that the information be either deleted or corrected.
Furthermore, you can add a copy of your credit report with each mistake circled or underlined, as well as copies of all supporting papers. Having your letter notarized and including copies of your driver's licence and a utility bill as identification may be useful in some cases.
- Keep your copies of the filing: Despite the fact that the bureaus are required by law to respond within 30 days, most clients receive a response within a few weeks due to the process' high level of automation. Keep your papers on hand and arrange them properly while you are waiting for a response.
- Go to a higher authority, if necessary: If your dispute/correction request was denied by the bureau, you can file a complaint with a higher authority like the Consumer Financial Protection Bureau (CFPB) or the office of the attorney general. These authorities can investigate the case, fine the reporting bureau, or force them to fix the errors through legal procedures.
Credit Card Applications
A record of each credit card application you make appears on your credit report. Although it has no bearing on whether you are approved for the credit card or not, filling out the application might damage your credit score. Multiple applications submitted in a short time will lower your credit score. Therefore, it is indeed better to limit the number of credit card applications you submit.
How Many Credit Cards is Too Many?
There is no maximum number of credit cards a person may have because people are in different financial situations. Still, the best method to establish credit and benefit from additional features like rewards, convenience, fraud protection, and more is to have at least one credit card.
However, having many credit cards may be advantageous if you make a variety of monthly purchases and your credit limit restricts the amount you may charge without negatively impacting your credit usage.
In any case, make sure to always make your payments on time and in full to avoid interest charges.
Credit Limit and Balance
Credit cards come with limits on the available credit from your card issuer. Do not use all your credit; it will make lenders think that you are a risky borrower. Consequently, it will hurt your credit score.
The highest balance ever charged on your credit card is listed as a "high balance" by many credit card companies. Therefore, even if you use the whole limit on your credit card and pay it off, the high debt may still appear on your credit report. To avoid being seen as a careless borrower, try to keep your credit card debt below 30% of your credit limit.
Monthly Credit Card Payments
One of the key elements affecting your credit score is how quickly you pay your monthly credit card bills. Your credit score will increase if you pay for your credit cards on time, but it will decrease if you make late payments.
Typically, late payments are not reported to the credit agencies until they are 30 days past due. If you are late on credit card payments by a few days, you may have to pay a late charge. But as long as you pay before the deadline of 30 days, your credit score should remain unharmed.
Keeping Your Credit Cards for a Long Time
Your credit score benefits from having open credit cards for a longer period, especially if you have a good payment history with those cards. Keep your oldest credit cards close at hand and use them sometimes to raise your credit score, but also make sure you occasionally check out the newest credit card offers. If you have a strong credit score, you can be eligible for a credit card with better conditions and benefits than the one you've had for many years. For example, you can go for credit cards that charge low interest rates, offer attractive cashback, provide a convenient travel experience, come with 0% interest, or those that are easy to get with poor credit scores.
Carrying a balance on your credit card is not a good practice. It is better to pay your bill in full. Nevertheless, if you must keep a balance, try not to go below 30% of your total credit limit.
It may be better or worse to cancel unused credit cards. There are several factors that can determine whether such a cancellation might have a positive or negative effect on your credit score. They include your credit history, whether there are outstanding credit balances, and your bankruptcy status. Therefore, asking your card provider to reduce the credit limit could be a better option if you are worried about your unused credit cards. That way, you will be able to use them occasionally without incurring a high debt.
No! What is the use of having a credit card if you do not intend to use it? An inactive credit card can hurt your credit score. So, try to use your credit cards.
Credit bureaus use the activeness of your account to calculate your credit score. That is why not using your credit card for a long time could mean an inactive account and lower your credit score.
Experts recommend that you use your credit card no more than once every three months. Always remember that the more often you use the card and make prompt payments on your credit, the better your credit score.
Six months is a good period to keep a credit card open. The duration provides enough time for you to build a credit history that can be used to calculate your credit score.
There are many things you can do to improve your credit score. Most importantly, you must make sure to use your credit card occasionally and pay your bill on time. For more tips, we strongly recommend that you read our article on the 12 common credit card mistakes to avoid making if you want to improve your credit score.
Preserve Your Creditworthiness!
According to Warren Buffett, “Creditworthiness is like virginity: it can be preserved but not restored very easily.” Therefore, do your best to maintain a good credit score by keeping your credit cards active with low balances and in good standing. Also, do not stop using a credit card without a good reason. Always remember that when your credit card is inactive, it could lead to the closure of your account and may further hurt your credit score.