Question: I've heard that my account might be closed if I don't use my credit card. Is this true? - Becky
Answer: Hi Becky,
This might seem odd, but yes, it's true. Most consumers think that showing restraint and having a zero balance should make you desirable to the credit card issuer. Actually, the opposite is true.
Credit card issuers make money in the form of interchange fees every time you use your card. If you buy groceries and pay with a credit card, the issuer gets an interchange fee, which is a specified percent of the sale. So when you don't use your credit card at all, the card issuer doesn't receive a benefit. And if your balance is at zero, the issuer doesn't receive interest expense revenue.
An issuer also has to balance risk with possible rewards. You aren't using your available credit, so the issuer might decide to give that credit to someone who might use the card and produce revenue for the issuer. Basically, the issuer weighs a lot of different factors before deciding to close an account.
What Happens to Your Credit Score When an Account Is Closed
Most consumers first worry about losing the credit history and how that will impact their credit scores. But a closed account can stay on your report for up to 10 years. So this isn't an immediate concern.
The more important thing to worry about is your credit utilization ratio, which is the amount of credit you've used compared to the amount of credit you have available. When a credit card account is closed, you lose the credit limit that was part of your available credit. This can increase your ratio and that lowers your credit score.
Steps to Take Right Away
When an account is closed due to credit problems, there's not a lot you can do. But when it's closed due to inactivity, call the credit card issuer and explain why you haven't used the card in a while. You can promise to start using the card again in a limited way if they will reinstate your account.
If it's a rewards card and you no longer can use the offered rewards, ask the issuer if you can transfer your credit limit to another rewards card that meets your current needs. Before you make the call, do a little research online and see what other credit cards are offered by this issuer.
Now, if you stopped using the credit card because you're concerned about getting into debt, that's different. Take time to think about this carefully before you ask to reopen the account. There's no shame in making the decision to forgo credit cards because you're worried you might get into debt. On the contrary, it takes courage to admit that.
How to Stay Minimally Active With a Credit Card
To keep your card account from being closed due to inactivity, use your card at least once every two or three months. If you'd rather not have to keep track of the last time you used it, then use the card for a small monthly automatic payment. For instance, let's say you have a gym membership that costs $50 per month. Set up your unused credit card as the form of payment for that expense. Occasionally, use it for a bigger expense, such as a week's worth of groceries.
However you decide to keep your card active, make sure you never spend more than you can pay off when the bill arrives. This way, you can keep your credit card open and take good care of your credit, too.