Since credit card companies do not have to give you any warning, this can come out of the blue – your credit card is suddenly closed due to inactivity and your credit score drops. Generally, you run the risk of having your credit card closed after 12 months of inactivity, but it can also only last a few months, so it’s hard to predict. This is what you can do to avoid a surprise ahead of time without thinking too much about it.
Why do credit card companies not warn you?
It does not have to be. According to Forbes, the 2009 Credit Card Act states that creditors must notify lenders of 45 days of major changes to the terms of their accounts, but the courts have subsequently ruled that credit card cancellation is not applicable due to inactivity. This does not mean that banks do not give you 30 days notice (some laws of the state do requires it), it is just not guaranteed.
Also according to ForbesAs banks lose up to $ 100 per year per inactive card, they are encouraged to close accounts. This may explain why the range of acceptable inactivity varies from a few months to a few years, even though it is usually a year (if your card has an annual fee, it is less likely to be closed as a free card ).
That being said, if you are unsure about the policies of your card, your agreement with the terms and conditions of your card should include information on how they handle inactive accounts.
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Why does it matter?
Unexpectedly closing a credit card can seriously damage your creditworthiness, sometimes at the worst possible time, such as when you are about to apply for a loan. This is because 55% of your credit score is based on how much unused credit you have available, the average age of your credit lines and the credit mix you have (e.g. mortgage loans, car loans, credit cards). If you suddenly lose a card, these categories are affected. Some research suggests that, at least anecdotally, a closed credit card can lower your credit score by approximately 100 points.
What is the best way to prevent an inactive card?
The obvious answer is to use each of your credit cards for at least one purchase every few months, but it can be easy to forget unless you make a point of it, especially if you are not bringing all your cards with you.
Instead, a simpler approach is “set and forget” to plan your card so that it pays for a cheap, recurring subscription you already have. If it’s an invalid entry – say every three or six months – even better. In my case, I use an old card to pay for my Spotify subscription automatically – and nothing else. I also set up my card so that my checking account automatically pays the balance every month, just in case I forget that the card exists (since it’s buried somewhere in a drawer).
By doing so, I actually only use my longest credit card (more than ten years) for the credit history, and to a lesser extent for the extra total credit, entirely to keep my credit score increased. And it works.