There are numerous factors that can impact your credit score. To ensure that it stays as strong as possible, it’s suggested that you keep debt at reasonable levels, pay all your bills early or on time and refrain from opening or closing too many accounts in a short span of time.
But, what happens when your level of credit card usage drops?
Not a lot, really. But that doesn’t mean inactivity doesn’t play a role in how your score is determined. If you have credit cards you don’t use and you’re worried they’ll cause your credit score to plummet, here’s everything you need to know.
Credit utilization and the length of your credit score
While your payment history is the most important factor that makes up your FICO score, the second most important factor is your credit utilization — or the percentage of debt you have in relation to your credit limits.
For example, someone who owes $3,000 in balances with a total credit limit of $10,000 would have a 30% utilization rate. Unlike your payment history, which may remain unchanged if you always pay your bills on time, your utilization can change each time your credit score is pulled. And if you have credit cards that you never use, your utilization rate will always be zero.
While it’s easy to assume a zero percent utilization rate would catapult you to a perfect credit score, that’s not necessarily true. FICO consumer affairs manager Barry Paperno explains it by saying, “The idea here is the lower, the better, in terms of the utilization percentage, but something is better than nothing.”
Utilization is figured for each individual credit card you have, as well as all of your cards together. While having one or some of your cards at a zero balance is fine, having zero balances on all of your revolving accounts can cost you a few points.
How low should you go? In an interview with Bankrate, FICO spokesman Craig Watts said, “If your utilization is 10 percent or lower, you’re in great shape as far as utilization goes.”
Another factor to be aware of is the length of your credit history. This factor makes up another 15% of your FICO score. If a credit card issuer closes one of your accounts due to inactivity, you’re bound to take a hit in this category — particularly if the account that was closed was one you’ve had for a long time.
The amount of time between card inactivity and account closing
Credit card balances are reported at different times of the month, usually when your credit card statement closes. So, you can use your cards for regular spending, allow balances to accrue and pay them off each month to avoid interest. You’ll still show utilization this way, and you don’t have to rack up debt to do it.
Using more than one or two credit cards on a regular basis may prove difficult. What’s even tougher is that there’s no real standard for how long it takes for an account to be closed due to inactivity. Credit reporting agencies, like Equifax will tell you that it depends on the credit card company.
Since there’s no clear activity deadline, it’s best to try to use all of your cards every few months, even if that means setting up auto-pay on a few of them to keep them active.
Don’t let a closed account ruin your day
If you do find one of your accounts was closed due to inactivity, remember that it’s not the end of the world. You have the option of calling your credit card company to request that they reinstate your account. Although, they may need to do another hard inquiry on your credit report to do so.
Also, remember that there are plenty of other ways to maintain a strong credit score. But it starts by establishing a good payment history (35% of your FICO score) and keeping an eye on your utilization rate (another 30% of your score).
The road to good credit involves keeping a diverse mix of credit accounts (credit cards, installment loans, mortgages, etc.) and not going beyond what you can manage. You don’t have to do everything perfectly to have a good credit score. But if you’re consistent in the right areas, you’re bound to see improvement over time.