Does an Unused Credit Card Impact Your Credit Score?
People rarely have a single Credit Card. They have a couple of cards in their wallet. In a way, it is good to have multiple cards because of the more significant options you get. At the same time, it becomes a challenging task to manage all of them together. If you neglect a card or two while preferring to use a particular card, it remains unused for a long time and this can impact your credit score a great deal.
How Can Unused Credit Cards Affect Your Credit Score?
Lenders like to look at your credit score at the time of processing your loan application. You need a good credit score to be eligible to Apply for Credit Cards and loans. Various factors affect your credit score. Having a range of Credit Cards can work in your favour, especially if you use them well and ensure that you make the payment of all the Credit Cards on or before the due dates.
The problem with having multiple cards is that you might forget to pay a specific bill resulting in a default situation. It is a pure oversight on your part, but the credit bureau relies on documents alone. A default is a default. The circumstances leading to the default does not matter. Such a situation forces people to use specific cards alone while rendering a few inactive. An inactive Credit Card should not matter much. The period of inactivity is critical. If the cards remain dormant for an extended period, it can affect your creditworthiness.
The Credit Utilisation Ratio
An inactive Credit Card can improve your credit utilisation ratio (CUR) as long as it is live. The unused limit increases the denominator thereby enhancing your ratio. However, the card issuers can treat such an inactive card account as dormant and close it. Different Credit Card issuers have different criteria for determining the inactivity period. Usually, a card not used for a year can become inactive.
Should the Credit Card issuer inform you before closing an inactive account? Though you might like them to do so, it is not compulsory on their part to notify you in this regard. They have the right to take a unilateral decision and close the account. The Credit Card issuer does so to safeguard its interests as inactive card accounts can lead to frauds. As they close the account, the total available credit in your name decreases.Thus, it affects your credit score. Your CUR increases.
Length of the Credit
CUR is one factor affecting your credit rating. The length of the credit history is a critical aspect as well. What does an inactive card have to do with the length of your credit history? You can ask this question. Now, if the card issuer decides to close the inactive card, it affects the length of your credit history, especially if the card had been an old one. A shortened credit history affects your credit score. Therefore, closing your oldest Credit Card is never a good option.
Decide on Which Card to Close
You have seen that an inactive card can affect your credit score. At the same time, you also realise that holding multiple cards is a challenging task. You should strike a delicate balance between your Credit Cards. You can decide which card to close and which ones to keep alive. However, you should time your closure right. Closing a Credit Card account just before you apply for a Home Loan or Personal Loan is not the right thing to do. Keeping the card open can improve your CUR and thereby the chances of sanction of the Home Loan. After the Home Loan Approval, you can proceed with the closure of the Credit Card.
The question remains as to which card you decide to close. It is better to close the cards that are expensive and do not serve many purposes to you. Instead of renewing the cards and keeping it alive without using it, you can better close the Credit Card account.
Closing some of your inactive cards can also bring you peace of mind as you no longer have to remember to pay the bills on time. Secondly, possessing a large number of cards in your wallet is a sign that you are dependent on credit. It can also send a wrong signal to the lenders. You can contact us if you are looking for How to Get Credit Card Offers.
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