Are you aware that your credit card can be closed due to inactivity? Yes, you read that right! Credit card inactivity is a lesser-known fact that can impact your personal finances and credit score. In this article, we'll dive deep into credit cards, what happens when they're closed for inactivity, and how you can prevent it from happening to you.
Credit Cards Closed For Inactivity Table of Contents
Why do credit card companies close accounts for inactivity?
Credit card companies typically close accounts for inactivity because idle accounts don't generate profit for them. When you're not using your card, the banks aren't making money from transaction fees or interest charges. Furthermore, inactive accounts may be perceived as potential risks since they could be forgotten by the cardholders and fall prey to identity theft or fraud.
How does this impact your credit score?
Having a credit card closed due to inactivity can negatively impact your credit score, primarily through two factors:
- Credit Utilization Rate: Credit utilization refers to the ratio between your credit card balance and your credit limit. A higher utilization rate can lower your credit score. When a card is closed, you lose the credit limit associated with it, which affects your credit utilization rate, possibly raising it and hurting your credit score.
- Length of Credit History: A longer credit history positively affects your credit score. When a card is closed, it may shorten your average account age, especially if it's an older account, thus negatively affecting your credit score.
How to prevent your credit card from being closed for inactivity
If you have multiple credit cards and want to keep them active, consider these strategies:
- Regular usage: Use each of your cards at least once every three to six months. A small purchase can be enough to keep the account active.
- Multiple purchases with small amounts: Spread your spending across all your cards each month. This will not only help maintain your card accounts active but can also improve your credit utilization rate.
- Automatic payments: Assigning a small recurring payment, such as a subscription service, to each card can ensure regular usage and avoid accidental delinquency.
- Keep track: Regularly monitor your credit card accounts and transactions to ensure there isn't any unauthorized activity and to maintain awareness about the account's status.
Credit Cards Closed For Inactivity Example:
Imagine Jane has three credit cards, one of which she hasn't used in over a year. Her bank decides to close that card due to inactivity. Jane's total credit limit across all cards was $15,000, and she had a balance of $3,000 - giving her a credit utilization rate of 20%.
When her inactive card with a $5,000 limit is closed, her total credit limit will now be $10,000, making her credit utilization rate jump to 30%. This higher utilization rate will likely cause a dip in Jane's credit score.
To prevent this situation, Jane could have made occasional small purchases using the inactive card or set up an automatic payment to a subscription service to ensure it remains active.
Now that you understand the consequences of having a credit card closed due to inactivity, you can take proactive steps to maintain your credit score and ensure your card accounts remain open. Want to learn more about personal finance, investing, and credit management? Explore other guides on Flik Eco and subscribe to our newsletter for updates. If you found this article helpful, don't forget to share it with your friends and help them secure their financial future as well.