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You may have forgotten about that old credit card sandwiched between your Blockbuster membership ID and that Subway rewards card entitling you to a free footlong, but its issuer has most assuredly not forgotten about you. Even though you’re not using them, inactive credit cards still can affect your credit score and your bottom line.
More than a quarter of U.S. credit card accounts are considered dormant. That means at some point you need to decide what to do with that credit card you haven’t used since the Bush administration—either one. But if you wait too long, your credit card issuer may make that decision for you by canceling the card. Card companies don’t have an unlimited amount of credit and would rather extend it to individuals who will use it. Losing the use of a card you’ve ignored might not seem like a big deal, but having a card unexpectedly canceled is almost never in your best financial interest.
Why a canceled card can hurt your credit score
You don’t want your credit card issuer closing your accounts, because that takes a major financial decision out of your hands and can have a serious effect on your credit score. How does that unloved credit card still influence your credit score? The answer is something called “credit utilization.”
Lenders love it when you keep a low amount of debt compared to the credit you have available, because it’s an indication that you’ll have little trouble paying back the money you borrowed. On the other hand, a high amount of credit utilization signals to lenders that you are overextended and are at a higher risk of defaulting on your loans.
To determine credit utilization, lenders use the following formula:
Current Balance/Total Available Credit x 100 = Credit Utilization Ratio
If you have a card with a $100,000 limit—hey, let’s dream big—and a current balance of $10,000, then your credit utilization for that particular card would be 10% (100,000/10,000 x 100 = 10). If you have multiple credit cards—which of course you do, otherwise why are you reading this?—then you simply add up all of your cards’ balances, divide that number by the combined credit limits on your cards, and multiply by 100.
While there’s no set-in-stone rule, most experts recommend you keep your credit utilization below 30 percent to avoid a significant ding to your credit score. Obviously, the lower your credit utilization the better, as far as lenders are concerned.
With credit utilization in mind, it should become clear why an old, unused card still plays a role in your overall credit score. Let’s say you have three credit cards, each with a limit of $5,000, and two of those cards carry a balance of $1,600 each, while the third, dormant card has no balance on it at all. Currently, your credit utilization is around 21%. But if you cancel that unused credit card, your credit utilization jumps to 32%, which is not a good look for you.
Why a dormant card is a security risk to you
Another reason you want to pay attention to dormant credit cards is that other people see them as opportunities for a quick, illegal spending spree. Even if you haven’t used a credit card for months, it is still linked to an active account that fraudsters may use in any number of scams and schemes.
Sure, banks tend to offer fairly robust fraud protection services, but you also probably don’t want to spend your lunch hour going through outlandish purchases with a credit card issuer to determine which ones are fraudulent and which are legit. Putting that dormant credit card to use means you’ll also be keeping on top of its statements so you stop fraud before it can even start.
How to revive your dormant cards
There’s likely a good reason a dormant credit card became so unloved in the first place. Most likely, it makes more financial sense to use a different card. So if you shouldn’t cancel it, but you can’t ignore it, how do you deal with such a troublesome card?
One of the best actions to take is dedicating the card to paying for a small, recurring subscription such as your Netflix account or gym membership. That way you aren’t using it for purchases better-suited to your favorite credit card, but it remains active so the issuer doesn’t yank it away from you and raise your credit utilization rate.
If you want to make it even easier on yourself, have your credit card issuer automatically debit the balance on this card from your bank account so there’s no risk of forgetting a payment. But make sure you aren’t neglecting the card completely. It’s your responsibility to look over the statements and pay attention to any fraud alerts from your issuer.
Another alternative for getting a little-used credit card back in regular rotation is to explore with the card issuer whether they can upgrade the card. If a version of the card exists that gives you better rewards, that may be enough encouragement to have you start swiping away once more.
The article, Should You Worry About Your Dormant Credit Cards?, originally appeared on ValuePenguin.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
