Why you should use your rarely used cards — especially now
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Editor’s note: This post has been completely updated with the latest credit card information.
As credit card issuers prepare for some customers to default due to financial difficulties related to COVID-19, they’re looking to reduce risk. One simple way of reducing risk is closing accounts — or reducing the credit line on accounts — that haven’t been used recently.
However, even if you don’t use some of your cards frequently, you may not want the issuer to close your account or reduce your credit line. Here’s why you may want to keep rarely-used accounts open, as well as how to do so.
Why credit card issuers close accounts
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 your sock drawer. After all, issuers generally make money three ways:
- Interest payments: Interest is generally charged when you carry a balance from month to month, and can be avoided by paying off your balance in full each month
- Fees charged to consumers: Fees such as annual fees, late fees, cash advance fees and balance transfer fees are generally avoidable, but may be worth paying for the benefits and convenience they provide
- Processing fees paid by merchants: When you use your credit card, the merchant must pay a processing fee equal to a percentage of your purchase
So, issuers want cardholders that will allow them to make a profit through these fees. As such, issuers want to continue offering credit to cardholders who will use their card and not default on their payments.
But issuers also need to minimize the risk on cardholders who aren’t profitable — such as those who don’t use their card but have a high credit limit. As such, issuers may choose to decrease the credit line on underused accounts and completely close unused accounts.
Related reading: Getting a refund even after your credit card is canceled
Why you should try to keep card accounts open
When one of your card accounts is closed, your credit score will usually decrease. For example, when my mother-in-law recently closed her cobranded Southwest credit card, her credit score dropped by about 20 points.
Related reading: How to check your credit score for absolutely free
Once an account is closed, you’ll have less credit available to you, which hurts your credit utilization ratio. For example, if you have $3,000 of credit card debt and four cards each with a $5,000 credit limit, you are using $3,000 of $20,000. But if an issuer closes one of your cards, you are now using $3,000 of $15,000, which automatically results in a higher credit utilization ratio.
Generally, you’ll want to keep your credit utilization ratio under 30%. So, if an account is closed (or your credit line is decreased) and you want to keep the same credit utilization ratio — and hence minimize the impact on your credit score — you’ll need to either reduce your credit card debt or increase your credit limit. As such, you’ll either need to pay down debt on another account or ask one of your other issuers for an increase in your credit line.
Related reading: What is a good credit score?
Your credit score could also dip if the credit card that is closed is one of your oldest. One of the factors that helps 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. So, it’s best to work extra hard to keep your oldest accounts open.
Related reading: 6 things to do to improve your credit
How to keep infrequently used card accounts open
There are many reasons you may not use a card frequently — but especially if the card may be useful in the future or is one of your oldest accounts, you likely want to keep the card active. Here are two behaviors that will help.
Spend on each card at least once a year
Generally, you should use an account at least once a year to keep your account active. So, my husband and I review our accounts about every six months and load $5 from each rarely-used account onto my Amazon Gift Card balance. Doing so keeps the accounts active and we use our Amazon balance to purchase gift cards and other products we need.
There are other ways to spend regularly on your cards. For example, you could set up at least one subscription service — such as Hulu, ESPN+ and Disney+ — on each of your cards. Or, you could designate each card for a specific category of spending, such as gas, groceries, restaurants, travel purchases and charity donations — although you’d want to make sure you align the cards with the categories in which they earn the most rewards.
Related reading: The best cash-back credit cards for each bonus category
Watch for closure notices
Some credit card issuers will notify cardholders about a card closure, while others will just do it. So, if you receive a notice that your card account will be — or has been — closed, you may be able to keep the card account open by calling and making your case.
For example, about a year ago I received a notice that my cobranded United Airlines credit card was being closed. I called the number on the back of my card and explained to the agent why I wanted to keep the card. I hadn’t used this card in the last year, but I said that I hoped my travel on United would soon increase, which would mean I’d be using my card more. The agent agreed to keep my account open, but I could have prevented this situation by using my card even just a few times each year.
Related reading: What to do before you close a credit card
Additional reporting by Dan Rafter.
Featured photo by Isabelle Raphael/The Points Guy.