If you have a credit card you’re not using anymore, you may be familiar with this popular suggestion: make one small purchase with it every month. That way, the card issuer won’t cancel it for inactivity.
This advice probably gets repeated more often than credit cards actually get canceled for inactivity. Credit card companies are in no rush to get rid of cardholders, especially those who have been model customers in the past.
There is a possibility your inactive card will get canceled. But that’s a worst-case scenario and if it’s gathering dust anyway, you’re not losing much. And although you may have heard that a closed credit card is bad for your credit score, that’s not exactly how it works.
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A closed credit card won’t always hurt your credit
The main way a canceled credit card could affect your credit score is through your credit utilization ratio. Your credit utilization is the total amount you owe on your cards compared to your combined credit limit across all your cards. It counts for 30% of your FICO® Score (the most widely used type of credit score). When one of your credit cards is canceled, you lose its credit limit. If you’re carrying balances on other credit cards, your credit utilization will increase and your credit score could decrease.
Let’s say you have a few different credit cards, and your combined credit limit across all of them is $20,000. Only one card has a balance, and it’s $4,000. Your credit utilization would be 20% in this scenario, which is good. If another card with a $10,000 limit gets canceled for inactivity, your total available credit would be cut in half, and your credit utilization would go up to 40%. That would likely cause a drop in your credit score.
The solution, of course, is to avoid carrying large balances on your credit cards. Even if you have a card canceled, your credit utilization should remain low.
The age of your credit accounts can also affect your credit, and there’s a common misconception that you lose a credit card’s account history once it’s closed. That’s not true. A credit card that was always paid on time will remain on your credit file for 10 years after it’s closed. You’ll have more than enough time to build a lengthy history with other cards before that closed account drops off your credit file.
A better way to manage your credit cards
Instead of trying to do the minimum to keep a credit card open, focus your energy on finding credit cards you want to use regularly. Look for cards with benefits you like and that earn plenty of rewards in the areas where you spend the most money. Once you’ve gotten one or more cards like this, put all your spending on them to maximize your rewards.
The benefit to this method is that you put all your time and energy into getting value from your credit cards, not just using cards for the sake of keeping them open.
When it comes to credit cards you’re no longer using, you have a few options. If the card has an annual fee, you should either cancel it or downgrade it so you don’t keep paying for something you don’t need. With no-annual-fee credit cards, you can either hang on to them or cancel them.
Just make sure to keep your balances low (or better yet, pay off your credit cards in full each month) so that a canceled card won’t bump up your credit utilization too much and damage your credit.
View more information: https://www.fool.com/the-ascent/credit-cards/articles/why-you-shouldnt-make-small-purchases-credit-card-keep-it-open/