If you don’t use your credit card, it’s possible that you may forget about it and still face financial difficulties such as a lower credit score or potential fraud. Therefore, it’s important to be aware of these consequences of having an unused credit card and take steps to protect yourself.
3 Ways an Unused Credit Card Could Hurt Your Finances
Although it’s important to pay off your balances, it’s not good to have an inactive account. In this message, we will outline three potential financial problems that can arise from not using your credit card and provide tips for managing them.
1. Your Credit Score May Drop
If you have a balance on your credit card and decide to freeze it, make sure to continue making your monthly payments. Once you pay off the balance, it’s worth celebrating, but make sure to do so responsibly. Avoid making large purchases that could put you back into debt. After you have paid off the balance, you can resume using your card normally.
If you want to improve your credit score, it’s important to keep using your card and make payments on time. Closing your account can actually negatively impact three out of the five factors that affect your credit score.
- Payment history, which counts for 35% of your score.
- Credit utilization, which counts for 30%.
- Length of credit history, which counts for 15%.
Maintaining an open credit line can significantly impact your credit utilization, which is the proportion of available credit you are using, in addition to contributing to your credit history.
Suppose you have two credit cards, each with a $1,000 credit limit. You paid off the balance on one of the cards but still owe $300 on the other card. If you close the card that you paid off, your credit utilization rate will double to 30%. Keeping both cards open would result in a utilization rate of 15% which is better for your credit score as higher utilization has a negative impact.
If you choose to keep your credit card accounts open but stop using them, it could still harm your credit payment history, which is a significant factor in determining your credit score. Therefore, simply putting your cards away in a drawer is not a recommended approach.
To maintain a good credit score, consider subscribing to services like Netflix or Spotify with affordable monthly fees that you can consistently pay off each month. It’s not the amount you pay but the timely payment of your credit card balance that affects your credit score.
2. Your Credit Limit Could Be Slashed
Credit card companies may reduce a cardholder’s credit limit during times of economic uncertainty to prevent them from accumulating unmanageable debt.
According to a report by the Consumer Financial Protection Bureau, a reduced credit limit can have harmful consequences, and this occurred during the initial phase of the COVID-19 pandemic.
According to the report, if the available credit on a card is reduced, even if the balance remains the same, the card’s utilization rate will increase. This increased utilization may cause lenders to consider the consumer a higher credit risk, potentially making it more difficult for them to obtain credit.
You may experience an unexpected cost if you fail to regularly monitor your credit limit, as the reduction could affect you.
- You may incur over-the-limit charges if you try to charge a product that surpasses your updated credit limit.
- If you increase your credit utilization ratio by hitting the lower limit, it could negatively impact your credit score.
To avoid over-the-limit fees in case your credit limit is reduced, make sure to check your credit card statement or log in to your account online every month.
3. You Could Be a Fraud Victim Without Knowing It
Personal story: I own four credit cards, but I use only one of them frequently. I make it a habit to check the recent transactions through each card’s respective app every week.
I discovered two charges on one of my cards from a gas station and a fast-food restaurant, which made me suspicious. Although the charges were not significant, I reported the card stolen since I knew it was secure in my possession.
If I had assumed that my cards were safe because I wasn’t using them, I might have faced a nasty surprise at the end of the month. I could have been charged late fees if I didn’t open my statement.
The message is advising to regularly check credit card accounts even if they are not being used to avoid fraud and theft. If the card has not been used for a few months or the balance has not been monitored, the transactions should be reviewed more closely.
If you download the official apps for each of your cards, you can easily access your card information, customer service contact, and receive reminders for cards that you may not have in your wallet but still need to manage.