Why Creditors Close Inactive Accounts
This issue depends on a business decision. Companies have a limit on the credit they can extend, and it’s better for them to grant credit to individuals who will make purchases and incur interest. After all, this is the bulk of how credit card companies make money. Closing an unused credit card gives the card issuer the ability to extend that credit to another borrower who will use the account and help increase their profits.
What Happens to Your Credit Score
If your account is closed, it may increase your overall credit utilization – depending on the balance across all your credit cards – negatively affecting your overall credit score.
Your credit utilization is the amount of available credit you are using, and it constitutes 30% of your credit score. When a credit card is closed, the credit limit is no longer considered in your credit utilization. So, if you have a balance on all your other credit cards, your credit utilization increases.
For example, if you have a total debt of $3000 and a total credit limit of $5000, your credit utilization would be 60%. If a credit card with a limit of $1000 is closed, your credit utilization will rise to 75%. A credit utilization ratio of less than 10% is ideal. Any number above 30% is too high.
Although there have been widespread reports stating that closing a credit card affects your credit score by shortening your credit history, this is not entirely true – at least not yet. As long as the account appears on your credit report, it still impacts your credit score. Your credit history length will only affect your score when the account is removed from your credit report (after about ten years), especially if it is your oldest credit card.
What You Can Do About It
If you discover that your credit card will be closed due to inactivity, and it is a card you wish to keep open, contact your credit card issuer and request to keep it open. Offer the issuer a proposal to make a purchase on that account immediately in exchange for reopening it.
You may not be able to convince the credit card issuer to reopen a closed credit card. However, you may be able to transfer the credit limit to another credit card with the same issuer, which should help with your credit utilization.
You can also mitigate the impact of the closed credit card by paying down some of your credit card debt or requesting a credit limit increase from other credit card issuers. The credit card issuer will consider your credit history, the time since your last increase, current income, and other factors when deciding whether to increase your credit limit. If you have a joint credit card, the credit history of both cardholders and other factors will be considered.
How to Prevent Closure of Inactive Credit Cards
There is no standard time limit for inactivity, so it’s hard to predict when your credit card will be closed by its issuer. This could be after six months, a year, two years, or more.
You can prevent the card from being closed due to inactivity by using the credit card periodically. One easy way to do this is to put one or all of your recurring bills – expenses you expect to pay each month – on your credit card, such as phone or utility bills. Alternatively, make a few small purchases on your credit card every two to three months and pay off the balance in full upon receiving the statement. This way, you’ll keep your credit card open and active, and your balance will be paid off.
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Sources:
Experian. “What is the Credit Utilization Rate?”
Source: https://www.thebalancemoney.com/closure-inactive-credit-cards-961069
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