Cancellation of an Inactive Credit Card Could Ding Your Score!

Are you one of those people who rarely uses their credit cards because of the fear of falling into debt? Well, in that case, you should be aware that by avoiding the use of your credit card, you stand the risk of losing your account due to inactivity.

To you, it may seem like a strange reason for an issuer to close a consumer’s account, but there’s some solid logic here. Card companies have only so much credit limit that they can extend to consumers. If you’re not using your credit card regularly, you are a missed opportunity for them. The issuer would rather close your account and extend that limit to someone who’s more likely to use the card to make purchases. And, if the borrower fails to pay back the amount within the stipulated time frame, the card company can make even more money off him in the form of interest.

An issuer is legally allowed to close an inactive account without prior indication to the customer. However, many companies prefer to give advance notice before pursuing this course of action. In either case, what you should know is that an account closed due to inactivity can have a negative effect on your credit score.

The Effect of an Inactivity Cancellation on Your Credit Score

Firstly, if the issuer closes an inactive account, it could increase your overall credit utilization ratio by decreasing the total amount of credit available to you. Let’s say you have two cards, each with a credit limit of $1,000. This means that your total available credit limit is $2,000. On the first card, you carry a balance of $500, which takes your credit utilization ratio to 25%. Now if the card company were to close your second account due to inactivity, your available credit limit would fall to $1,000 and your credit utilization ratio would rise to 50%. Credit utilization accounts for 30% of your total score, and should be ideally maintained at 10% of your total available credit. A rise in this ratio above 30% is perceived to be risky and could significantly ding your credit score.

Another way in which an inactivity closure can affect your credit score is if you have just one credit card. In this case, closure of your credit card account would negatively affect the types of credit you have on your credit report, which accounts for 10% of your total score.

It’s widely assumed that a closed credit card influences your score by shortening your credit age; however, that’s not completely true – at least, not in the short term. An account, even after it’s closed, appears on your report for about 10 years – and during this time, it is factored into your credit score. However, once it falls off your report, it can impact your credit score negatively.

What You Can Do About an Account Cancelled Due to Inactivity

If your card company informs you that they are about to close your account, you can request them to keep it open. You may even offer to make a purchase on that account immediately if they do not shut it down.

If the issuer has already closed the account, then there’s not much you can do. Though you can ask the company to reinstate the account, they are not legally liable to do so. Moreover, even if you get your account back, it is unlikely that you will also get the rewards associated with it. In some cases, the company may transfer the limit on the closed card to a new card with the same issuer. This will at least ensure that your score is not affected due to an increase in your credit utilization ratio.

Nevertheless, the best thing to do is to avoid such a situation altogether by using your card for making small purchases at regular intervals and then paying off the balance in full, and on time. This way, you’ll always get to keep your card, which can be a boon if you need funds during emergencies or a loan for a short period of time.

In fact, at Fund&Grow, we utilize creative credit card financing to offer to our clients unsecured credit of $50,000 - $250,000 at 0% interest. For our services, we charge a small fee, but the client is free to do as he pleases with this money. Thus if you need funds in this range, call us at (800) 996-0270 and we’ll help you get the funding you need.