Not using a credit card may impact your credit score negatively. Read ahead to know how an inactive credit card affects your credit score.
What Happens to an Inactive Credit Card
When you don’t use a credit card for a long time, the issuer might close your credit card account, or reduce your credit limit. The time frame depends on the card issuer and they don’t necessarily have to inform you before taking the decision.
This in turn might hurt your credit score. Keep reading to know how.
How Does Not Using a Credit Card Hurt Your Credit Score
Not using a credit card does not directly affect your credit score, but your credit report might be indirectly impacted. When your issuer reduces your credit card limit or closes your account, here is how your credit score can be impacted -
Affects Credit Mix
You might have built a nice credit mix to improve your credit report. When the credit card issuer closes off a card suddenly, this mix might be affected, especially if that was the only revolving credit account you held.
Your creditworthiness might take a hit, as a good credit report should show that you can manage a variety of credit accounts responsibly.
Increases Credit Utilization Ratio
When a card is closed or its limit is reduced, your Credit Utilization Ratio (CUR) is bound to increase.
This might severely impact your creditworthiness, as lenders might see you as credit hungry if your CUR is too high. Make sure to keep your CUR under 30% at all times.
Affects Credit History
Suppose you had an old credit card for 5 years and it gets closed by the issuer due to inactivity. It will impact the duration of the active credit history you have. Without that old account, you will again be new to credit.
This will negatively affect your credit report and your creditworthiness, as your credit age helps decide the risk involved in approving your loan.
Shows a Lack of Planning
The closure or reduction of your credit card balance will show on your credit report for a minimum of 10 years. It will give an impression to future lenders that you could not maintain your credit cards tactfully.
Either you took more cards than you could manage, or simply couldn't keep your cards active. Both of these will question your financial planning skills.
How Do Credit Cards Affect Your Credit Score
Maintaining your credit card accounts responsibly helps build your credit score.
Here is how -
Your credit card repayment history helps show future lenders how you make payments. If you make timely payments in full, your credit score will improve steadily.
If on some month, you are unable to pay your credit card bills in full, consider paying the minimum amount within the due date. This way, you will be able to improve your credit report.
Having more credit cards increases the total credit available to you. This, in turn, reduces your credit utilization ratio.
If you have responsibly managed and held a credit card for a long period of time, your overall credit age improves. This makes you a less risky borrower.
How many credit cards you own also helps prove your creditworthiness. Successfully managing a maximum of 3 credit cards is the ideal situation. But too many credit cards may again make you look like a credit-dependent person.
Tips to Utilize a Credit Card to Improve Your Credit Score
A credit card is an example of revolving credit which is a great option if you want to build a robust credit report.
Here are some tips on utilizing a credit card to build your credit score -
Apply only for cards that you can use
Keep your card active by making small purchases, or paying utility bills
Pay your credit card bills in full before the due date every month
Don’t spend more than you can afford just because credit is available
Avoid having too many credit cards as managing them might become cumbersome
Monitor your credit score regularly
Conclusion
Not using a credit card will not directly hurt your credit score. But if the company decides to reduce the limit, or completely close the account, your credit score may take a hit. Thus it is important to make minimal use of all your credit cards at regular intervals.
Credit cards, if used responsibly, are a great way to improve your credit score. And a good credit score can get you easy access to affordable credit products.
