Having a credit card and not using it might seem like a smart, responsible way to manage your finances. Well, not always while the credit card is unused it seems harmless, many credit card holders don’t understand the consequences of inactivity and how it relates to their credit score.
Let’s dig a little deeper into the consequences of inactivity on the credit card and how it affects your financial life.
Factors influencing credit score
Before you begin using any methods, it is important to know what impacts your credit score:
- Repayment history: The most critical aspect is paying your loans on time.
- Credit utilisation: The ratio of your current credit usage, to your available credit.
- Length of credit history: Old credit history is generally favourable.
- Credit mix: A good mix of secured and unsecured loans improves your credibility.
- New credit requests: Too many applications over a short period of time may harm your score.
How inactivity affects credit score
1. Credit utilisation ratio: If you never utilise the card, you are keeping that rate low, which is good for your credit score. However, if the issuer closes the account due to inactivity or lowers your credit limit, your utilisation ratio is likely to go up, which could impact your credit score.
2. Risk of account closure: Credit card issuers may close accounts with no activity for long periods of time. While that may seem like a hassle, it can affect two components of credit scores:
- Credit age – If you cancel an old unused account, your average credit age may decrease.
- Available credit – Cancelling an account decreases your total credit limit, which affects your utilisation ratio.
3. Payment history: Because payment history is the most significant factor of your credit score, the fact that you’re not using your card can impact your credit score negatively.
In conclusion, even if you choose to ignore a credit card altogether, inactivity can slowly diminish your credit profile. The best option is to use your card on a regular basis but generally for minor amounts so that its presence can continue to positively influence your financial profile.
Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
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