How Credit Card Inactivity Impacts Your Credit Scores

It’s strange, but from time to time, I get a small pop in the volume of the same question. It happened to me last week. I was asked four times on the same day about the impact of credit card account inactivity on your credit reports and credit scores.

What this probably means is someone with a much more visible profile made some statement on TV or radio and their answer wasn’t believable enough.

So let’s tackle the question at hand: how does credit card inactivity impact your credit?

The knee-jerk answer is, “it doesn’t”, but that leaves too much meat on the bone. Account inactivity CAN have an impact on your credit, but it would be indirect.

Is Your Account Active or Inactive?
Credit reporting is very flat, meaning your credit reports only show you a snapshot in time of what your credit history looks like. There is no chronology of balances, which means it’s hard to determine from a credit report if an account is active or inactive.

For example, if you have a credit card with a $0 balance on a current copy of your credit report, it appears that the account is inactive. The problem is that balance is from last month’s statement and the card may have been used since the last month’s statement was cut, thus the account is now “active.”

Because you can’t determine activity from a credit report, credit scoring models cannot be harmed or helped by your past usage activity. However, the credit card issuer’s reaction to your usage patterns can make its way to your credit reports and that’s where the game changes.

Is Your Credit Card a Stick in the Mud?
If you choose to stop using your credit card account, for whatever reason, the revenue generated by that card dries up ,unless that card has a balance or an annual fee. If the card has a $0 and no annual fee the card issuer depends on your usage in order to make money. No usage means no interchange fees (aka “swipe fees”). Add that to the absence of interest and annual fees and the card becomes a drag to the issuer.

In fact, if there is no usage, no balance, no interchange, and no annual fee, then the card drops below the $0 mark on the revenue curve. Credit card issuers incur a cost to maintain your account in their systems. They pay the credit bureaus for periodic credit reports and scores on you as part of their account maintenance practices and they spend time and energy trying to figure out how to get you active again.

There’s a cost to all of this, which is why you’re a “loss” while you’re inactive.

The Indirect Impact of an Inactive Credit Account
Eventually, the issuer is going to throw in the towel and close your account. Here’s where the indirect impact to your credit is going to occur. When a credit card issuer closes your account (for whatever reason) you immediately lose the value of the unused credit limit on that card. This means your infamous revolving utilization percentage could go up, and it could go up a lot.

The impact to your credit is going to vary based on a couple of variables. If you carry credit card debt on other cards, the impact could be significant. If the credit limit on the newly closed card was very high, the impact could be significant.

If the credit limit was very low (like on a retail store card) and you don’t have credit card debt elsewhere, the impact is likely to be almost meaningless.

Prevention is Key
If this is a concern for you, there’s a way to prevent all of this. All you have to do is use your credit card from time to time. Now, I’m not suggesting that you get into debt and I’m not suggesting that you use it to buy things you wouldn’t normally buy.

I’m suggesting that you buy a tank of gas or use it to pay this month’s cable bill, which are things you’re going to have to pay for anyway. This way you’re killing two birds with one stone.

By using the card, and then paying it off immediately, you’re resetting the activity clock and it isn’t costing you a penny in interest. The credit card issuer is happy because they’re making revenue from the swipe fee, which is being paid by the merchant, not by you.

Best of all, you protect your credit because the issuer isn’t likely to close your account if you use it from time to time, even on modest purchases.