One query I frequently receive is whether credit card companies terminate accounts due to lack of use. In other words, can your card be canceled if you don’t charge anything to it for a certain period, and is this a concern you should have?
Many individuals involved in the miles & points strategy hold numerous credit cards — for instance, I personally possess more than a couple dozen cards. There are various reasons I retain these cards:
– Certain cards I keep for the rewards on spending that they provide, meaning these cards are naturally not inactive.
– Some cards I maintain for their excellent benefits, even without expenditures, such as hotel credit cards that provide annual free night bonuses.
– A few no-annual-fee cards I keep simply because having multiple cards and lowering your credit utilization positively impacts your credit score.
For the cards in your possession that you don’t actively spend on, should you be concerned about them being deactivated? Let’s explore that…
Reasons banks might decide to cancel dormant credit cards
Credit card companies assume a risk when they grant you credit. They generate revenue through annual fees, merchant fees (when you make purchases with your card), and interest charges (which do not apply if you settle your balance entirely each month).
Ultimately, there’s an opportunity cost for card issuers in extending credit that you are not using, as they could be providing that credit to someone more likely to utilize it.
In theory, it’s not unreasonable for a card issuer to contemplate closing your account if you haven’t shown any activity on a card for a prolonged time, particularly if it’s a no-annual-fee card, where the benefits for them are limited (they are less likely to close a card with an annual fee due to inactivity).
Reasons you might want to keep cards active without spending
As mentioned earlier, there are several reasons why keeping a card open may be beneficial, even if you don’t charge much on it. Certain cards hold value for the benefits they provide, which more than offset the cost of the annual fee.
In other scenarios, maintaining cards can actually aid your credit score. Your credit score consists of the following components:
– 35% of your score is based on your payment history (the percentage of payments made on time)
– 30% of your score relates to your credit utilization (the proportion of credit you are using compared to your total limits)
– 15% of your score comes from your credit age (the average age of your accounts)
– 10% of your score is derived from the types of credit you utilize (the variety of credit requests you have)
– 10% of your score pertains to requests for new credit (how often you have applied for credit)
Thus, at least 45% of your credit score (and potentially more) is positively affected by maintaining multiple cards over an extended duration.
30% of your score reflects your credit utilization, measuring the total amount of available credit you’re using. If you have a card with a credit limit that you’re not heavily utilizing, it benefits your credit score by reducing your overall credit utilization. It’s fair to note that there are other methods to keep that number down, such as settling your balance before the statement closes.
Additionally, 15% of your score is influenced by your average credit age, so keeping some cards long-term positively contributes to that factor.
My experience with accounts closed due to inactivity
Throughout my extensive time in the credit card “game,” I’ve had a card closed due to inactivity only once. This occurred in 2021 when Citi closed a card after I hadn’t used it for several months. Ironically, the inactivity period wasn’t particularly long.
Generally, it seems that cards are typically closed when there’s been no activity for over 12 months. Therefore, you don’t necessarily need to charge something each month, but it’s wise to make at least one transaction every few months.
Moreover, remember that the issuer might take your overall relationship with them into account when deciding to close a card. In other words, if you hold five cards with an issuer and actively use four, they are likely less inclined to close the fifth compared to if you have just one card with no activity.
No-annual-fee cards are also more susceptible to deactivation due to lack of use since there’s at least some advantage for card issuers if an annual fee is being paid. Yet, there appears to be some randomness to this matter.
Making small purchases can prevent cards from being closed
If you are worried about your card being terminated due to inactivity, the simplest method to mitigate this risk is to make some minor purchases every few billing cycles.