When it comes to credit cards, they typically fall under the use-it-or-lose-it scenario. If you do not actively use all your cards, your credit issuers may close your accounts. But, if you’re not using them anyway, you may be wondering why it matters if your credit card accounts get closed.
Unfortunately, there are several downsides to losing an account due to inactivity, particularly if you have had it for a long time. If you want to maintain a good credit score, you need to make regular, on-time payments and have a low credit utilization. When your account gets closed, these factors get negatively impacted, and your credit score can take a hit. Let’s take a closer look at how often you should use your credit card to keep it active, the importance of credit usage, and other factors you should consider.
- The general rule of thumb is to use your credit cards at least once every 6 months, but if you can afford it, aim to swipe your cards at least once a month.
- If one of your credit accounts gets closed, that can negatively impact your credit score and existing rewards and benefits.
- If you find it difficult to use your cards regularly, there are several simple ways to keep your cards active.
Why Credit Card Usage Matters
Once you stop using a card long enough, your credit issuer will close your account or stop reporting it to the credit bureaus, hurting your credit. Regularly using your cards not only helps keep your accounts open but can give you additional perks because you’ve established a relationship with the credit issuers.
When I applied for the Chase Freedom Flex a couple of years, I had a few issues with my application process before I was approved. After many months of active usage and on-time payments, my credit line has more than doubled, and I got pre-approved for the Chase Sapphire Preferred and other Chase cards.
While there is no universal standard for closing inactive accounts, some banks may be more proactive than others. Some may shut down your account after 6 to 12 months of inactivity, while others may allow your account to remain open for a couple of years. Generally, you should use your cards at least once every 6 months, but if you want to be safe, aim to swipe your cards at least once every 3 months.
Depending on the types of cards you have, there are benefits to regularly using your cards. With the American Express Gold Card, I earn 4% on dining and $10 in Uber credits each month. I also get $10 in dining credits at select restaurants such as The Cheesecake Factory and Shake Shack. Despite the $250 annual fee, these perks, plus others, make up for the cost and I was able to earn enough points to cover the costs of a round-trip flight to Japan.
Some other negative repercussions to think about include:
- Rewards expiring: Though most reward cards have points or cashback rewards that do not expire, certain travel rewards and store cards expire after a period of inactivity.
- Losing rewards or benefits: If your credit issuer closes your account, you will lose any existing rewards you earned, such as mileage, cashback, or points. Additionally, if your card has specific benefits such as airport lounge access, you will lose access to those too.
- Unnoticed fraudulent activity: If you never check your credit card statements, you could be a victim of credit fraud without realizing it.
- Getting embarrassed: If you decide not to use your card for a year and on an off chance you try to use it, it may get declined because your credit issuer closed your account.
Some of these problems may not matter to you, but if you have a significant amount of points or cashback saved up or great travel perks, losing the account could be very disappointing. Alternatively, if you do not want to keep making new charges, you can carry a balance on the account month over month. In this situation, your card will get considered active until you repay your balance in full. But, if you choose to do this, you may end up paying high interest rates.
Why Credit Card Companies Care
Now you may be thinking, “why do credit card companies care so much about this?” It all comes down to their bottom lines.
There are 3 main ways credit card companies make money.
- Swipe fees: Also known as processing fees, credit card companies charge merchants a tiny percentage of each transaction you make with them. That is why sometimes merchants charge a fee when you use a credit card — they are passing the swipe fee onto you.
- Interest payments: If you do not repay your debt in full every month, credit card companies will charge interest on your card balance, which adds up over time.
- Annual fees: By charging an annual fee, the card issuer guarantees some form of payment every year whether you use the card or not.
If you are not using your card or carrying a balance, the credit card company does not make money from you. In fact, you are costing them money to maintain your account. That is why they would rather close your account and extend the credit line to someone else who will use it.
Extending credit to active users is important because most credit card companies only have a limited amount of credit they can extend to their customers. Though card issuers used to charge inactivity fees to make up for keeping idle accounts open, the Credit CARD Act of 2009 ended that practice. Although the new law allows you to keep your cards open for free indefinitely, that also incentivizes credit card companies to close inactive accounts.
Do Creditors Need to Warn You Beforehand?
Federal law requires credit card companies to send you a notice when they make major account changes, but not for inactivity. That means credit card issuers are not required to warn you when they are about to close your account due to inactivity. However, they may do so anyway to give you a second chance to use your card and encourage you to keep your account open.
But, there are some exceptions. For example, in states such as California, card issuers are required by law to give you 30 days notice beforehand. So, depending on where you live, you may want to investigate the rules in your state. In most cases, you will receive a letter from your credit card issuer after they close your account, but not before or if they stop reporting to the credit bureaus. If you are not sure about the status of your card, you can try making a purchase with it or checking in with customer service.
Financial Consequences of Closing a Credit Account
If your account gets shut down, it could have negative repercussions on your credit. Exactly how impactful it is will depend on your credit profile and history.
When your credit card account gets closed, the data stays on your credit reports for 10 years if it got closed in positive standing. But, if your account gets closed in a delinquent status, the account will get removed after 7 years. Cards that get canceled for inactivity are considered positive, so they will not count as delinquent.
3 main ways closing a credit account can hurt your credit are:
1. Credit Utilization
Credit utilization is one of the main factors that go into your credit score calculation. If you lose a card, that will directly impact your overall credit utilization rate or the amount of credit you use compared to your total available credit. Most people generally recommend a credit utilization of 30% or less, so losing one card could significantly increase your credit utilization and hurt your credit score.
For example, imagine you have 3 credit cards:
- The Citi Diamond Preferred has a balance of $1,000, with a credit limit of $5,000
- The Chase Freedom Unlimited has a balance of $2,000, with a credit limit of $4,000
- The Bank of America Travel Rewards has a balance of $1,500, with a credit limit of $7,000
In this example, your total credit limit is $16,000, and your total card balance is $4,500. That means your overall credit utilization is ~28% ($4,500 / $16,000), falling just under the recommended utilization rate.
If your Bank of America Travel Rewards card gets closed due to inactivity, your credit limit will decrease to $9,000. With your credit line nearly halved, your overall utilization significantly increases to 50% ($4,500 / $9,000). This change will likely cause your credit score to drop in the near term. You can try to fix the situation if you have enough money to pay down your balances, but if that is not possible, you are stuck with the higher utilization and lower credit score.
2. Average Age of Accounts
Part of the calculations for your credit score considers your length of credit history. Depending on the age of your other accounts, if one of your cards gets closed, your average age might drop, hurting your score. For example, if an old credit card you have had since high school or college gets closed, that can significantly decrease the average age of your credit accounts.
3. Total Number of Accounts and Variety of Credit
If you have a small number of credit accounts or a relatively short credit history, losing one account may be a problem. While credit mix only accounts for a small percentage of your credit, one of the ways creditors vet potential borrowers is by looking at your ability to manage different types of credit accounts. For example, that could mean your student loans, auto loans, and credit card loans. If you do not have enough variety of accounts in good standing, you may not get approved for certain loans.
3 Ways to Keep Your Cards Active
If you are struggling to keep your credit card accounts active, we have a few tips for you to try out:
1. Keep all your cards in your wallet and use them for small purchases
If there’s a card you do not like using because you have other cards that give better rewards, consider keeping it in your wallet and using it for small purchases every once in a while. Credit issuers do not have minimum requirements for how much you need to spend, so keeping your card active could be as simple as using it to buy boba or treating a friend to lunch once every few months. In short, any purchase will work.
If you have multiple credit cards, you can alternate small purchases between your different accounts to keep all of them active. Currently, I use my Amex Gold Card (Referral Link) as my primary card for purchases, but I make sure to swipe my other cards at least once or twice a month to keep them active.
2. Put a small recurring charge on cards you do not use regularly
If you are worried that you will forget to use some of your cards occasionally, you can set up a recurring charge on them. For example, I set up an automatic charge for my Spotify Premium subscription on a card I do not use as much these days to ensure I keep it active. Depending on the credit card company, you may even get to set up automatic repayments on the due date so you will not forget to pay off the balance.
3. Make different cards your primary card for online shopping accounts
If you shop online often and have accounts with various retailers, you can set up cards you do not like using as your primary payment method. That way, you make sure that you are using the cards enough to avoid closure resulting from inactivity.
Do not feel forced to spend money. But, if you can afford to, aim to use each credit card at least once a month. Creditors like to see people pay off their balances on time and in full, so doing this will help your credit score improve.
Overusing Your Credit
On the other hand, you should avoid overusing your credit. Common mistakes that people make with credit cards are making purchases they cannot afford or not paying off high balances. According to CNBC, the average American had a credit card debt of $6,194 in 2019, while only 39% of Americans can pay off a $1,000 unexpected expense in 2021.
If you spend more than you can afford to pay off at the end of your billing cycle, you will end up carrying a balance. Over time, this balance accrues interest, which can potentially have a snowball effect on your debt. Additionally, the higher your balance, the higher your credit utilization becomes, making you seem like a reckless spender.
Even if you have enough money to pay off all your balances on time, if you make too many transactions during the billing cycle, that can be problematic. That is because your balance usually gets reported to credit bureaus like TransUnion, Equifax, and Experian when your credit statement closes rather than after your payment due date. If you have a high balance and do not pay it off before your balance gets reported, it will seem like you are using too much credit.
One way to address this issue is by paying off your balance throughout the billing cycle rather than waiting until the payment due date. That way your credit utilization will appear lower on your credit report. In the past, I have paid off my credit balances in advance so that it wouldn’t seem like I was overspending. You can also ask your credit card issuers to increase your credit line if you use your cards a lot, though they may do a hard inquiry in the process, dinging your score by a few points.
The Bottom Line
If you are juggling several credit cards, it may seem like a lot of effort to keep them all active. But, it doesn’t have to be. We recommend figuring out a system that works best for you. That way, you can stay organized and keep track of all your cards. Creating a functioning system will help prevent your cards from closure due to inactivity.
And remember, you do not always have to get everything right the first time. Even though I only have 4 credit cards, I still find it hard sometimes to use all of them regularly. It just takes a bit of practice and trial and error to get your process set up.