As time goes on, our credit card habits change. We might have gotten a new travel credit card to take advantage of certain perks but our needs changed. Our very first credit card may have the longest history, but it doesn’t earn us any rewards, so it collects dust.
No matter which rewards credit cards you have in your wallet, though, it’s important to avoid inactivity cancellations on your oldest accounts where you can. This can be easily remedied by making small purchases a couple times a year, and can help your credit score in the process.
Why Credit Card Cancellations Happen
It’s no surprise to learn that if you don’t touch a credit card for an extended period of time, it might be unexpectedly cancelled on you. After all, if you needed the card you would use it. Since you don’t – and haven’t in quite some time – the creditor chooses to close out the account and extend that line of credit to someone else (who will hopefully tack up charges and pay them plenty in interest).
It’s a smart business move, after all. Even still, it’s something you want to avoid if you can.
The amount of time that a creditor will allow a card to remain inactive before cancelling the account varies. For some, it takes years and years of empty statements for them to finally give up on you. Others take a more proactive approach, only waiting months before cutting their losses.
No matter how perfect your history was with the card, or how short of a time you allowed it to be inactive, a cancellation will have an impact on your credit score.
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How It Dings Your Credit
There are two areas of your credit score where a cancelled account will negatively impact you, both in the short- and long-term. One of them is with your credit utilization, and the other is when calculating your average age of accounts.
Your credit utilization is the amount of debt you hold compared to the credit that you’ve been extended. Ideally, you want to keep this number below 10%, and anything over 30% needs attention.
If you have a credit card just sitting around unused, its limit is still playing into your overall credit utilization. Let’s say that you have two credit cards. One is unused with a $2,000 limit, the other has a $3,000 limit and a $1,500 balance. Even though you don’t use the former card, it’s still factored in – you have an overall credit limit of $5,000.
Because you carry that $1,500 balance, your total credit utilization is 30 percent. If that unused card with the $2,000 limit is cancelled, though, your total credit limit suddenly drops to $3,000… and your utilization shoots up to a whopping 50% overall.
This is why it’s important to keep even your unused credit cards open, especially if you hold balances on other revolving accounts.
Average Age of Accounts
A small part of your FICO credit score (thought to be about 10%) is comprised of your average age of accounts (AAoA). This gives potential creditors a good idea of your actual credit history – how long you’ve been positively managing lines of credit that were extended to you.
If you close a credit card or have an account cancelled due to inactivity, that card stops reporting new activity to your credit report. Eventually, in a few years, it will fall off completely. This means that at some point, your overall average will stop including that card, which may drop the number substantially.
Let’s say that your very first credit card is 25 years old. It’s no-frills, but you’ve had it since you first went to college. However, you stopped using it because you recently discovered the magic that is cash back rewards. You opened two new travel rewards cards this year, and the old card has been collecting dust.
One day, you learn that your first account has been cancelled due to inactivity. It stays on your credit report for the next seven years, reaching a total account “age” of 32 years before eventually falling off.
The day before that account fell off your credit report, your average age of accounts was approximately 15.3 years. Once that card disappears, though, (leaving only the two younger cards) your average AAoA drops to only 7 years.
While this only plays a small part in your total FICO score, it does have an impact.
If you want to avoid having an a credit card account cancelled due to inactivity, there’s a very simple solution. Just use the card once every six months.
Also, don’t forget to downgrade your annual fee credit card to a no annual fee credit card. This will keep your average age of account intact.
There’s no hard and fast rule regarding how long a company will let your account sit inactive. However, it’s unlikely that they will cancel a card after only a couple months. Many wait until the 1-2 year mark, but you probably aren’t going to get a clear answer from them ahead of time.
A safe rule of thumb is to simply make a small charge using the card every 6 months. Then, immediately pay it off once your statement arrives. It doesn’t matter whether you buy a pack of gum, pay your utility bill, or buy a big screen with it. The point is to just show some activity on the account to avoid closure.
Closing an account – or having one cancelled – can have negative impacts on your credit score, both immediately and down the line if it’s an old account. The best way to avoid both is to show regular activity, by making a small charge every six months. Even if you never use the card otherwise, your credit score will thank you.
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