Credit card inactivity can have a whole host of repercussions. All too often, we barely realize these consequences and simply assume it to be a good thing. After all, we are not utilizing credit that is freely available to us, living a debt-free life, etc.
However, surprising at it may seem, credit card inactivity can, in fact, work in ways against you.
With that thought in mind, we look at some critical aspects of credit card inactivity that you may not have considered in the first place.
Impact on Credit Score
Wait, what? I don’t use my credit card at all and that affects my credit score? Well, yes, if you do not use your credit card at all for an extended period, it can potentially impact your credit score.
We will illustrate this credit card inactivity scenario with an example to help you understand better.
Let’s say you have a total credit limit of $10,000 available to you across all your credit cards. Of this, you utilize only $4,000, which is a fairly good ratio of 40% credit utilization.
Now, out of this $10,000 credit limit, there was a credit card with a $2,000 limit that you never used for a long period of time, such that it was ultimately canceled by the bank.
So, now instead of a $10,000 credit limit available to you overall, you only have $8,000. Of this, you have utilized $4,000; that’s a 50% credit utilization.
To you, a 10% difference might not seem like much, but banks tend to assess things differently. To them, you are now in a riskier position since you are utilizing HALF the credit limit that has been assigned to you.
Based on this assessment, your credit score could very well see some downward movement. Therefore, anytime you have a credit card that has not been utilized for a long period of time, consider the possible detrimental impact it can have on your credit score.
Impact on Credit Availability
Credit card inactivity that leads to credit card closure can have a dramatic impact on your credit availability.
Yes, the counter-argument can be that the credit card(s) in question was/were not required in the first place, but that is often a matter of hindsight; access to credit in emergencies can sometimes even prove to be a matter of life and death!
Taking the same example that we cited above, let’s say that instead of a $10,000 limit available to you, you only had the $2,000 limit, which was available to you on the card that got canceled.
Now, with that card canceled, you are effectively out of credit limit altogether. You will now have to deal with any situation that might possibly come up, where having a credit card on you would have been the deal-breaker.
In a less extreme scenario, let’s say there are two separate cards with $2,000 limits on each of them; when one gets canceled due to inactivity, half of your credit limit is gone and you will now have to plan your expenses all the more carefully.
Otherwise, you risk using the sole credit card available to you excessively, way beyond the advisable level.
Banks are Free to Close Inactive Credit Card Accounts
Banks are completely free to close inactive credit card accounts. Not only that, they are not liable to provide any justification for doing so, although in most cases, at least a notice is sent out in advance.
It is not very difficult to actually understand and appreciate this aspect; at the end of the day, banks issue credit cards so that they make money out of customers in the form of fees and interest charges.
Naturally, when you do not use your credit card at all, banks do not earn anything out of you! You are not really a customer they want and therefore, they do not mind going ahead and closing your inactive credit card account altogether.
After all, the credit card inactivity seen in your case is hogging up precious credit limit doled out to all their customers. If you are going to remain an inactive credit card customer, they might as well dole out that same credit limit to some other customer who will actually use it – and ultimately help the bank make money!
Therefore, if you are an individual with an inactive credit card, be prepared for a sudden closure of your credit card account by your bank.
Surprises on Credit Card Inactivity Can Be Avoided
Thankfully, there are solutions at hand that can ensure there are no surprises even after you have not used your credit card for a long time.
Firstly, as we mentioned, it is usually not a “Boom! Your credit card is no longer valid” kind of a scenario. Usually, banks do send you a notice about their intent to do so once they notice credit card inactivity to be a regular feature on your credit card.
This is the time you need to be agile and use your card promptly. Once you have done that, it is time to contact your bank and tell them that you have used your credit card and intend to continue doing so, going forward. As a regular customer, your bank should not have any qualms taking your card off its “inactive credit card” status.
In case your bank has already rendered your card as inactive, even then all is not lost. Firstly, you could call your bank and ask them to reinstate your card, assuring them that a ‘credit card inactivity’ scenario will no longer apply in its case going forward. Secondly, besides calling your bank, you could also consider writing to them, which is often more fruitful in producing the desired results.
In all the above, the clear message is that having a credit card and letting it slip into a ‘credit card inactivity’ position is far from desirable.
If you have a credit card, you must use it. You don’t have to use it every day if you don’t want to; even if you use it say once or twice a month, it will be more than sufficient to convey to your bank that you are a regular user of a service that you have availed from it.