Why should you hang on to a credit card that you don't use very often? MoneyTips will give you two very good reasons: it serves a suitable source of emergency credit if needed, and it raises your credit score by keeping your credit utilization low.
Your credit utilization is the total amount of your credit in use to your overall available credit (the sum of all your credit limits). As you get closer to using all of your available credit, lenders and credit-scoring systems consider you to be at higher risk for non-payment and eventual default — and as a result, your credit score will drop.
Unfortunately, the potential consequences of not using your credit card can be worse than that. If you don't make charges on the card periodically and carry no balance, the credit card issuer may think that you no longer plan to use the card and can declare the card inactive, cancelling your account.
The credit card company incurs some costs to keep your account open and it recoups those costs through your use of the card. If you don't use the card enough to cover those costs, the card issuer may make a simple business decision to cancel your account and free up that available credit for a customer who is more inclined to use it.
Card issuers vary on their policies for declaring an account inactive, and those policies are not always public. A good rule of thumb is that somewhere between six and twelve months with no signs of credit activity can result in a cancellation.
A cancelled account may not only drop your credit score through raising your credit utilization, it may also impact another factor. Adam Carroll, Founder and Chief Education Officer of National Financial Educators, explains: "What most people don't understand is that when you have a long-standing trade line, which is what a credit card is considered on your credit report, and you cancel that card for whatever reason, your score will actually go down as a result, because one of the main impacts on your credit score is the length of your credit history."
If the cancelled card is relatively new compared to your other accounts, there will be no significant impact on your average age of credit accounts – but if you have used a card for many years and decided to shift it to an emergency backup card, it's especially important to keep that account active.
How do you prevent cancellation of your card? Obviously, you have to pay your bills and avoid default on that card, but you should also keep your credit score as high as you can. For example, if your credit score plummets because of a student loan default or maxing out a separate credit card, the card issuer may consider you too risky even if your record on that particular card is spotless.
If your card is cancelled, follow up with the issuer to find out the reason why. The reason could be something beyond your control, such as the card issuer discontinuing that particular card or no longer offering the same terms. There could also be an error in your credit report, or fraudulent use of your account, that is giving the card issuer an incorrect view of your risk. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Aside from those steps, the best way to maintain a card is to make a small charge – perhaps $10 every few months – and then pay the bill off promptly each month. Follow the old axiom "Use it or lose it" – just don't use it very much.
If you want more credit, check out MoneyTips' list of credit card offers.