Use Your Credit Card Before Your Score Drops

Using your credit card to improve your credit score sounds counterintuitive, doesn’t it? I mean, doesn’t racking up additional credit card debt hurt your score?

Yes, it does, but not using your credit card also has its risks. If you go long enough without making any transactions, the credit card company could make your card ‘inactive’ or close it down altogether. And an inactive or closed credit card can negatively impact your credit score.

How Inactive Accounts Affect Your Credit Score

If you go a long time without using your credit card, the card issuer begins reporting the account as inactive. That means it’s no longer included in your credit score. You could lose positive points you were receiving from that account. Depending on your other credit card balances and credit limits, your credit score could drop. To understand why this happens, you first need to know what a debt-to-credit ratio is.

Debt-to-credit ratios

How much debt you carry is a factor that accounts for 30% of your credit score. But your debt is not measured by simply adding up how much you owe. Rather, it’s measured using something called a debt-to-credit ratio. Your debt-to-credit ratio, also known as a credit utilization rate, is the amount of your credit card balances relative to your credit card limits. For instance, $300 charged to a credit card with a $1,000 limit means you have a 30% debt-to-credit ratio on that card. The higher your credit card balance, the higher your debt-to-credit ratio.

A low debt-to-credit ratio will help your credit score; a high ratio will hurt it. To learn more, read this article about cancelling credit cards and how that affects your credit utilization. 

When a credit card becomes inactive, that card’s limit is no longer factored into your level of debt. Your overall debt-to-credit ratio goes up, which may cause your credit score to go down.

How Closed Accounts Affect Your Score

Credit card companies have also been known to simply close your account after a period of inactivity. A closed credit card account has a similar, though more profound, effect on your credit score compared to an inactive credit card account. While you can reuse an inactive credit card and get it back into the credit scoring mix, you’ll have a hard time convincing your issuer to reopen a closed account.

In addition to a closed account hurting your debt-to-credit ratio, it also can reduce your length of credit history and thin out your credit file.

Length of credit history

Length of credit history accounts for 10% of your credit score. Length of credit history is calculated by adding up the years you’ve held each of your accounts and dividing it by the number of accounts. For instance, if you have three credit cards that are 10, 5, and 3 years old, your credit history has an average age of 6 years. If the 10-year-old account were to be cancelled, your average credit age would drop to 4 years. This reduced credit age could negatively impact your score. 

Note that closed credit cards will continue to stay on your credit reports for 7 years, so you won’t lose their history immediately. But when they do fall off of your report, you may see a drop in your credit score if you don’t have any other longtime credit card accounts. 

Thin credit files

You also have to consider the number of other active credit card and loan accounts you have on your credit report. When you only have a few accounts open - three or less - your credit file is said to be “thin.” It’s tougher to come up with credit scores for consumers with thin credit files.

How to Prevent Inactive or Closed Accounts

To keep your credit cards from going to inactive status, or worse, closed, you should use them periodically, at least once a quarter. Don’t go crazy, but do charge small amounts that you know you can pay off in full when you receive the bill. This way, you’ll keep your card active while avoiding any finance charges on the balance.