Credit cards are a convenient financial tool, offering benefits like rewards, cash back, and improved credit scores when used responsibly. However, many people hold multiple credit cards, some of which remain inactive for extended periods. While an inactive credit card may seem harmless, it can have unintended financial consequences, including risks, potential impacts on credit scores, and management challenges. This article explores the risks of inactive credit cards, their influence on credit scores, and provides tips on managing them effectively.
Understanding Inactive Credit Cards
An inactive credit card is a credit account that remains open but is not used for purchases or transactions over an extended period. Credit card issuers typically monitor card activity and may classify an account as inactive if there is little or no usage over a few months to a year.
Common Reasons for Inactive Credit Cards
Several factors contribute to credit cards becoming inactive:
- Having Multiple Cards – Many people have multiple credit cards but primarily use only one or two, leaving others inactive.
- Low Spending Needs – Some consumers avoid using their credit cards unless absolutely necessary.
- Store-Specific Cards – Retail credit cards may be used occasionally and then forgotten.
- Introductory Offers Expired – Some users open credit cards to take advantage of promotional offers and stop using them once the benefits end.
- Emergency-Only Usage – Certain credit cards are reserved for emergencies and remain unused for long periods.
Regardless of the reason, maintaining an inactive credit card without a management strategy can lead to financial drawbacks.
Risks of Inactive Credit Cards
While keeping an inactive credit card might seem harmless, several risks come with it:
1. Account Closure by the Issuer
Credit card companies periodically review accounts for inactivity and may close unused accounts. This can be problematic if the cardholder relies on that card for emergency use or wants to maintain access to the credit line.
2. Reduced Credit Limit
Even if the issuer does not close the account, they may reduce the available credit limit, which can affect credit utilization and purchasing power.
3. Potential Fraud Risk
Inactive cards are still susceptible to fraud. Since cardholders may not monitor them closely, fraudulent transactions can go unnoticed for an extended period.
4. Missed Rewards or Benefits
Some credit cards come with perks such as cash back, travel rewards, or discounts. Keeping a card inactive means losing out on these benefits.
5. Annual Fees
If an inactive credit card carries an annual fee, the cardholder might be paying for a card they do not use, leading to unnecessary financial waste.
Impact of Inactive Credit Cards on Credit Score
Credit scores play a vital role in financial health, affecting loan approvals, interest rates, and financial opportunities. Inactive credit cards can influence credit scores in several ways:
1. Credit Utilization Ratio
The credit utilization ratio is the percentage of available credit used. If an inactive credit card is closed or its credit limit is reduced, the total available credit decreases, leading to a higher credit utilization ratio, which can negatively impact credit scores.
2. Length of Credit History
The age of credit accounts contributes to credit scores. Closing an inactive credit card—especially an older one—can reduce the average age of credit history, potentially lowering the credit score.
3. Credit Mix
Credit scores consider the variety of credit accounts, including credit cards, loans, and mortgages. Having a diverse credit mix is beneficial. If an inactive card is closed, it might impact the overall credit portfolio.
4. Hard Inquiries for Reapplying
If a card issuer closes an inactive account and the cardholder later needs credit, reapplying for a new card results in a hard inquiry on the credit report, which can temporarily lower the credit score.
Tips to Manage Inactive Credit Cards
To avoid the risks associated with inactive credit cards while maintaining a strong credit score, consider the following strategies:
1. Use the Card Periodically
Make small purchases on inactive cards every few months to keep the account active. Consider using the card for recurring expenses such as a streaming service or a small subscription and setting up auto-pay to ensure timely payments.
2. Monitor Account Activity
Regularly check credit card statements and transaction histories to detect any fraudulent activity. Enroll in email or text alerts for added security.
3. Set Payment Reminders
Even if a card is inactive, outstanding balances or fees might still exist. Setting up reminders or auto-pay ensures timely payments, preventing late fees or negative credit score impacts.
4. Understand Terms and Fees
Review the credit card’s terms, including annual fees and inactivity policies. If the card has an annual fee but is rarely used, consider whether it’s worth keeping.
5. Request a Credit Limit Increase on Active Cards
If you anticipate closing an inactive card, requesting a credit limit increase on another active card can help offset the potential increase in credit utilization.
6. Keep Older Accounts Open
If possible, retain older accounts to maintain credit history length. Even occasional use of an old credit card can help preserve its benefits.
7. Convert the Card to a No-Fee Version
Some issuers allow cardholders to switch to a no-fee version of their credit card, helping them keep the account open without unnecessary costs.
8. Discuss with the Issuer
If there is concern about an inactive card being closed, contact the issuer to inquire about policies and potential solutions for keeping the account open.
When to Close an Inactive Credit Card
While keeping credit cards open is generally advisable, there are circumstances where closing an inactive credit card might be the best choice:
- High Annual Fees: If the card carries a high annual fee with no significant benefits, it may not be worth keeping.
- Temptation to Overspend: If having the card available leads to unnecessary spending, closing it may help control finances.
- Better Credit Options Available: If a new card offers superior benefits, rewards, or lower interest rates, closing an old, unused card may be practical.
- Security Concerns: If an inactive card has been compromised by fraud, closing it can prevent further unauthorized transactions.
Conclusion
Inactive credit cards may seem harmless, but they can pose risks, impact credit scores, and create unnecessary complications. Understanding how they affect financial health and taking proactive steps to manage them effectively can prevent negative consequences. By periodically using inactive cards, monitoring activity, and making informed decisions about whether to keep or close them, cardholders can maintain a strong credit profile and optimize their financial well-being.
