Nine Year Mortgage Outlines How to Handle Unused Credit Cards

Many people find themselves with unused credit cards.  Should these cards be closed or left open?  Should you try to use them occasionally or just let them sit idle?  Nine Year Mortgage has the answers.

How Unused Credit Cards Affect Your Credit Score

As you know from our previous posts on how Credit Scores are Calculated, there are a variety of factors that go into computing your credit score.  Credit cards with zero or balances can affect your score in two ways.  First, these cards improve your credit utilization ratio by showing you are choosing not to use all of the available credit you could be using, which helps your score.  However, you can also be penalized for inactivity on your accounts, particularly if your bank decides to close your account due to inactivity.

How to Use Zero Balance Cards to Your Advantage

To maintain a good credit score, try and use all of your credit cards regularly.  Let’s say you have four credit cards: one for work, another for personal expenses, one for a specific store, and the other for emergencies.  The “emergency” card is probably rarely used and likely has a zero balance.  Nine Year Mortgage recommends leaving the account open, but restructuring a few of your recurring monthly bills to make sure the account has at least some activity.  Pick two or three of your recurring bills that you can switch over to automatically pay with your emergency credit card, like a utility bill, cable TV, or cell phone bill.  This will help you keep the card active and open without incurring any expenses that you wouldn’t have been paying for anyway.

The banks that issue your credit cards make money in two ways, first by charging transaction fees to the stores where you make purchases, and second by charging you interest if you don’t pay your balance off each month.  The risk of not actively using your card is that the bank will close your account, after all, it does cost them money to keep your account open.  Some banks will leave the card open but charge inactivity fees, which should be avoided as well.  It’s better to invest a little time up front to transfer some small recurring expenses to your card, and avoid the risk of having it closed.  You can also set the credit card to pay automatically from your bank account so you don’ t have to worry about incurring interest charges.

Here’s an example of how this can happen. Let’s say that each of your four cards has a $1000 limit.  All together your cards have $4,000 in available credit. Now let’s say that you have $2,000 in total debt distributed between your four cards. If you close your emergency card (with the zero balance), you now distribute your $2,000 of debt to just $3,000 of credit. That suddenly makes your credit utilization ratio go from 50% to 67%.  The higher percentage of debt makes you look like a higher risk borrower because you are closer to maxing out your available credit.

Nine Year Mortgage Sums it Up

Don’t close that emergency credit card, even if you’re not using it very much, or ever.  Instead, set up a few of your small, monthly recurring expenses to charge automatically to your card.  Next, set up your bank to automatically pay off your credit card every month in full, so you won’t have to worry about incurring any interest or finance charges.  These tips will help keep your credit score healthy, and also keep that emergency credit card open in case you are faced with a real emergency.

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