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Banks want you to use your credit cards. It’s the only way they make money off that plastic. And if you have one or two cards that you never use, your bank might send you a warning that it plans to cancel those dusty cards.
You might not care. After all, you’re not using the card anyway. But your three-digit credit score can take a hit when your bank cancels a card. And that’s something that should matter to you.
“If your account gets canceled, you may witness your credit score decrease significantly,” said Adam Johnson, director of operations with San Diego-based ScoreShuttle.
Fortunately, it’s relatively easy to prevent banks from canceling even those credit cards you rarely use. The bigger challenge? Reducing the damage to your credit score if you don’t keep those accounts from closing.
Why Banks Cancel Cards
Don’t be surprised if a credit card provider closes a card that you keep tucked away in the far reaches of your wallet — or in your sock drawer.
“If your issuer notices that one of your credit cards has been inactive for a awhile, they could decide to cancel the account altogether, which they have the right to do,” Johnson said. “They are looking for ways to make money, which an inactive credit card won’t.”
Michael Cetera, credit analyst with New York City-based FitSmallBusiness.com (and a former TPG writer), said that credit card companies often warn consumers when they are about to close their credit cards, though this warning isn’t required.
If your credit card company does provide a heads-up, don’t ignore the warning. If you don’t want to lose the card, act to prevent a closing.
Cetera said that he has received both email and snail-mail warnings from a card issuer giving him several months’ notice that the company would close his credit card if he didn’t use it again. What’s key is that the issuer didn’t demand that Cetera make the dormant card his dominant one or that he charge a certain amount each month, just that he use it.
“That’s the key to preventing a card company from closing your card,” Cetera said. “Just use it, even if only occasionally.”
Cetera says that he has several cards that he opened just to earn the welcome bonus. The card’s ongoing rewards aren’t enough to entice him to use them on a regular basis. Cetera, though, doesn’t want to lose the credit lines that come with those cards, something that could hurt his credit score.To prevent this, he uses the cards just enough to keep those credit lines open.
How often do you need to use a card before the issuer threatens to close your account? This varies by issuer, but Cetera says that a bank might get itchy after you’ve gone a year or more without using a card.
“Avoid any nasty surprises by putting something, anything, on the card every so often,” Cetera said.
Why a Closed Card Hurts
If an issuer does close your card, it could hurt your credit score in two ways. First, you’ll now have less credit available to you, hurting what is known as your credit-utilization ratio. If you have $3,000 of credit card debt and four cards each with a $5,000 credit limit, you are only using $3,000 of $20,000. But if an issuer closes one of your cards, you are now using $3,000 of a total credit limit of $15,000, something that automatically results in a higher credit-utilization ratio.
Cetera says that you want to keep your credit-utilization ratio under 30%. If an account is closed, pay down another credit card equal to the amount of your now-closed credit line, Cetera said. You could also ask one of your other issuers for an increase in your credit line to lower that credit-utilization ratio.
Your credit score could also dip if the credit card that is closed is one of your oldest. One of the factors that help make up your credit score is the length of your credit history. If the average length of your credit history falls because of a closed account, it could drop your credit score.
“Preventive measures are the best way to avoid this: Make sure you’re actively using your oldest accounts,” Cetera said.
Megan Robinson, a Blacksburg, Virginia-based financial coach and personal finance expert with DollarSprout.com, says that an easy way to keep a card active, and open, is to assign it a spending category. Decide that you’ll use the card for gas, groceries or monthly subscriptions every month, and then pay off that card in full every time the bill comes due.
“That way, you don’t have to worry about racking up a large balance on the card, but the account maintains enough regular activity to keep it open,” Robinson said.
Just make sure you aren’t losing out on valuable points and miles in the process. For example, if you have a cobranded airline credit card you rarely use but want to keep open, don’t make that your go-to for dining purchases, since there are so many cards that can earn you lucrative rewards in that category.
J.R. Duren, senior editor at consumer reviews site HighYa.com, recommends that card holders put one of their cheaper recurring subscriptions on a card that they rarely use. Hulu or Netflix subscriptions are a good choice, especially since you won’t be missing out on too many bonus rewards if it’s a smaller charge.
Duren said that the key is to set these payments on auto pay and pay off your balance in full each month. “This way, you can keep the card open, you get the benefit of a big credit limit you aren’t using and you don’t have to worry about forgetting your payment and getting hit with a late fee,” Duren said.
Featured image via Getty Images.
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