If you don’t use your credit card, it may seem like you’re not spending any money and could forget about it. However, this could still lead to financial problems like a lower credit score and an increased risk of fraud. To prevent these consequences, be aware of the potential dangers of leaving a credit card unused.
3 Ways an Unused Credit Card Could Hurt Your Finances
Although it’s good to pay off your balances, having an inactive account isn’t ideal. This article will discuss three financial risks associated with not using your credit card and provide tips on how to handle them.
1. Your Credit Score May Drop
If you have placed your credit card on hold but still owe a balance, it is important to keep making monthly payments. Once you pay off the balance, you can celebrate responsibly without adding additional expenses to the card, which could lead to more debt. After that, you can continue using your card.
If you want to improve your credit score, it is recommended to keep using your credit card instead of closing it. By responsibly spending and making timely payments, you can positively affect three of the five factors that determine 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%.
Leaving a credit line open can affect your credit history and your credit utilization, which is the percentage of credit you are currently using.
Imagine you have two credit cards, both with a $1,000 limit. You paid off one card but have a remaining balance of $300 on the other. If you decide to keep both cards, your credit utilization rate would be 15%. However, if you choose to close the card you already paid off, your credit utilization rate would jump to 30%, negatively affecting your credit score even more.
Keeping your credit card accounts open is essential for maintaining a good credit score. If you don’t use your cards often, storing them away could still impact your payment history and ultimately harm your score.
To maintain a good credit score, consider subscribing to affordable services such as Netflix or Spotify that you can easily pay off monthly. What’s important for your credit score is that you make timely payments, regardless of the amount you’re paying.
2. Your Credit Limit Could Be Slashed
Credit card companies may lower cardholders’ credit limits during times of economic uncertainty to prevent consumers from accumulating debt that they may not be able to repay.
According to a report by the Consumer Financial Protection Bureau, a reduced credit limit can have harmful consequences. The incident occurred at the beginning of the COVID-19 pandemic.
According to the report, if a credit card’s available credit limit is reduced, that card’s utilization rate will increase, even if the consumer keeps the same balance. This increase in utilization rate could make lenders see the consumer as a riskier borrower, making it more difficult for the consumer to get approved for credit.
If you don’t regularly monitor your credit limit, you may unexpectedly experience a reduction that impacts you negatively.
- If you try to charge something that costs more than your new credit limit, you might have to pay extra charges called over-the-limit fees.
- If the lower limit causes your credit utilization ratio to increase, it may negatively impact your credit score.
To avoid over-the-limit fees due to a reduced credit limit, it is suggested to review your credit card statement monthly or check your limit online. If your credit limit is lowered, there are four ways to address the issue.
3. You Could Be a Fraud Victim Without Knowing It
Personal story: I have four credit cards, but I only regularly use one of them. I log into each card’s app each week to review recent transactions.
I noticed two charges on one of my cards from a gas station and a fast-food restaurant. Even though these are not unusual purchases, I knew my card was securely stored, so I reported it stolen immediately.
If I had assumed my credit cards were safe because I wasn’t using them, I could have faced unpleasant surprises at the end of the month. There was a risk of getting charged late fees if I didn’t open my statement.
The lesson from this is that it’s important to regularly check your credit card accounts for possible instances of fraud or theft, even if you are not currently using them.
If you have not used your card in the past few months or have not been checking your balance, you might not be closely monitoring your transactions.
If you download the official app for each of your cards, you can easily access your card information. This includes the customer service contact details and reminders for cards not in your wallet but still require attention.