Isn't it true that we all enjoy putting our credit cards perks to good use and shopping to our hearts' content? It is, indeed, a blessing to be able to satisfy our whims without havingo worry about paying right away.
When we come across a new card with a seemingly too-good-to-be-true deal, we want to test it right away to determine whether it's accurate.
And, of course, we forget about the 'burdening' previous card when we're utilizing our new credit line with all the great incentives.
As a result, all of your ‘not-in-use’ old cards will be marked as 'inactive.'
It doesn’t feel like a big deal as you weren't using the card, right? But unfortunately, having a credit account closed might cause your credit score to drop.
Don’t get it? Here’s what you need to know:
What’s An Inactive Credit Card?
As the name suggests, it's a credit account with no credit activity.
For example, no transactions are made, and no interest fees are paid or deducted for a long time with that specific account.
Your credit card company may notify you ahead of time that the bank will terminate your account, but they are not compelled to do so. Some businesses will cancel your account first, then send you a letter informing you of the closure.
In fact, some cardholders are unaware that their card has been restricted or closed until they attempt to use it and are refused.
Can Inactive Cards Affect Credit Score?
If we have to answer it in one word, then shortly yes! An active credit card can impact your credit, making it fall in the bad credit score range.
Having active credit isn’t a fair move for your credit rebuilding journey. So, should you close it? Or, keep it as it is? We’ll get to this later in our guide.
An inactive card might impact three credit scoring factors:
In layman's words, your inactive credit can have a 55% deciding effect on your credit score. Let’s understand the impacts in detail:
1. Increased Credit Utilization!
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Every credit noob knows that improving (or maintaining) a credit score requires a low credit utilization ratio.
For instance, if you want a good score, your aim should be a below 30% ratio. But, if you need to improve your score, your goal should be a ratio under 10%.
So, what happens to your credit utilization when an inactive card is closed?
Yes, you got it right: All you have done with that card towards achieving your credit score goal will be gone!
According to Borrowell, the average ratio in Canada is already above 43%. So this might explain why Canadians suffer from a personal financial crisis and fail to get good mortgage or loan rates.
2. Compromised Credit History!We all know how important a good credit history is for a good mortgage, insurance, business loans, and anything related to your monetary goals.
But unfortunately, an inactive slash closed card will directly smash your credit history by giving your account an ‘irresponsibly canceled’ status.
Thus, ruining your chance of getting affordable financial help for many years. Moreover, it could significantly influence your credit score if your closed card was your oldest account with the most credit history.
Bonus: Click to watch an expert video by John Ulzheimer explaining how much it will take for a credit account to go ‘closed’ on your record.
3. A Dip In Credit Mix!
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Keeping a financial balance is important as they say, ‘it’s easy to spend money but hard to earn it!’
The type of accounts that concludes a consumer's credit report are referred to as credit mix.
Having a credit mix can help you achieve your credit goal of having the best credit score possible as it can help you with the 10%. However, in terms of inactive cards:
Although your credit mix isn't the most influential factor affecting your credit score, having a range of open credit accounts might be beneficial if appropriately maintained.
Moreover, lenders prefer to see various credit accounts on your credit report since it demonstrates your financial responsibility.
Bonus: Click to read a comprehensive guide to know and understand the importance of credit mix for your good credit score.
Do All Inactive Cards Get Canceled?
Well, the answer to this question really depends on your card provider. Perhaps, there’s no set limit to an inactive credit card.
It could be a few no-use months or even two to three years. Still, the final say is of the lender and credit card company.
However, it’s hard to give an estimate of that duration. Furthermore, if you have a card you no longer use, you might want to contact your provider to know the details.
Should You Keep Your Inactive Card Open Or Ditch It?
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You might not have given much mind to the unsecured or secured credit card in your old wallet or credit drawer that has been paid off but hasn't been used in a long time.
However, after a specific amount of time, which varies based on the lender or creditor's standards, your account may be considered "inactive" and closed.
So, what’s worse? An inactive credit account or a closed credit account? Here’s your easy to understand breakdown:
Inactive Credit Account:
If you haven’t used a credit card in a while, say a year or even eight months, there’s a chance it has an ‘inactive status’ on your credit report.
Most people will instead prefer ‘closed’ to ‘inactive.’ But here’s what the experts say:
Moreover, the credit scoring models highly prefer accounts with good credit history and length. So, there’s really no downfall to it!
Note: You might want to consider the cancellation of an active yet unused card is hard to manage and maintain.
Closed Credit Account:
If you no longer use a card, you might find it bogus and unnecessary to pay down the annual or monthly maintenance fees. So, the best idea you got is to close the account.
However, closing an account will initiate a hard inquiry which can take a toll on your credit score.
The decision to keep an account open or closed is entirely a consumer’s choice.
However, keeping the account active by making a few transactions every other month can save your credit score, history, and credit utilization ratio.
Bottom Line
That’s it from our side, credit fellows!
We believe you’ll have the answer to your ‘inactive or closed account’ query by now.
And, you can predict all the unknown and hidden impacts of an unused credit account.
So, if you’re thinking of closing your old credit account, we suggest you think again because a high utilization and reduced credit history is the last thing you want to deal with.