Your credit card issuer has the legal right to close your credit card account when it thinks that's the best decision. When you go years, or even months, without charging anything on your account, don't be surprised if the credit card issuer cancels the account. After all, if you needed it, you'd be using it, right?
Why Creditors Close Inactive Accounts
Closing your unused credit card gives the card issuer the ability to extend that credit limit to someone who's going to use it. In other words, that's someone who's going to make charges and incur interest. It's simply a business decision all lenders have to make at some point.
Sometimes your credit card issuer will let you know in advance that your credit card is going to be closed. Others close your account first, then send you a letter telling you that it's been closed. Unfortunately, having a credit card closed, in some cases, can hurt your credit score.
What Inactivity Cancellations Do To Your Credit Score
First, your overall credit utilization will increase. Your credit utilization is the amount of your available credit that you're using and counts for 30% of your credit score. When a credit card gets closed, that credit limit is no longer considered in your credit utilization. So, if you have balances on all your other credit cards, your utilization increases.
For example, if you had a total of $3000 in credit card debt and a $5000 in limit, your credit utilization would be 60%. If a credit card with a $1000 limit gets closed, your credit utilization would go up to 75%. A credit utilization that's lower than 10% is ideal, anything above 30% is too much.
You can lessen the effects of a closed credit card by paying off some of your credit card debt or by requesting credit limit increases from your other credit card issuers. Of course, you may not receive a credit limit increase depending on your credit history, time since last increase, current income, and other factors used by your card issuer.
Though it's been widely reported that a closed credit card hurts your credit by shortening your credit age, it's not entirely true, not yet at least. As long as the account appears on your credit report, it's still factored into your credit score. It's not until the account drops off your credit report (in about 10 years) that your credit age could be shorted. Even so, it's something you should think about for the future. If you close all your old credit cards now, what accounts will be on your credit report 10 years from now?
What Can You Do About It
If you find out your credit card is being cancelled because of inactivity and it's a card you want to keep open, call your credit card issuer and request to keep it open. Offer to make a purchase on that account immediately in exchange for having it reopened.
You may not be able to convince the issuer to reopen a closed credit card, but you may be able to have the credit limit moved to another credit card with that same issuer, if you have one. While that won't eliminate credit score losses due to a shorter credit age, it will help you in the credit utilization area.
Prevent Inactive Credit Card Closings
You can prevent inactivity cancellations by using your credit card periodically. Make make a small charge on your credit card every two to three months and pay the balance in full when you receive the statement.
