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Last year, I received a notification that one of my credit card accounts had been closed because I hadn't made a new purchase with it for over a year. I hadn't been notified in time to do anything about it and was devastated since it was one of my oldest accounts and in good standing.
A few months later, I received a notification from a different issuer that another old card I rarely used would be closed for inactivity if I didn't use it within the next month. I no longer used that bank and the card didn't have a good rewards program, but I'd had the account so long, I didn't want it to drop off my credit report. So I acted fast to make a purchase and ensured it stayed open.
Why do issuers close credit card accounts, and why does it matter? Here's what to know, and how you can prevent your credit card from being closed like mine was.
Why Credit Card Issuers Close Accounts
When you aren't carrying a balance on a credit card and you're not using it for purchases, the issuer doesn't make money on the account (unless there's an annual fee). With no balance, there are no interest fees, foreign transaction fees, late payment fees and so on. Additionally, if you're never swiping the card, the issuer isn't making money on transaction fees from merchants.
When credit card accounts go inactive for long periods of time, the issuer may decide to close the account. Issuers can only extend so much credit overall, and even if you're not using your credit card, the issuer has to keep that credit available in case you suddenly need it. In some cases, they might prefer to extend that credit to a consumer who will actually use it.
While there's no standard deadline card issuers impose for cancelling a card, it's common for it to happen after a year of inactivity. If you're worried one of your cards might fall into this range, ask your issuer about their policy.
Some issuers also close accounts when a customer isn't adhering to the account terms. For example, if a cardholder repeatedly makes late payments or misses payments entirely, the issuer may decide the cardholder is too risky and close the account. According to the Consumer Financial Protection Bureau, a credit card issuer generally has the right to close an account at any time.
You May (or May Not) Get Notified
If your credit card issuer decides to cancel your account due to inactivity, they're not obligated to let you know ahead of time. This could be upsetting, especially if you have credit card rewards that disappear when the account closes.
While federal law does require 45 days of advance notice for major changes of terms, such as a change in fees or minimum payments, there is no requirement for notice of cancellation. This means your issuer may inform you that you must use your card within a certain period of time to keep it open—or you may just receive a notification that the account has been closed. In some cases, you may find out the card is closed when you go to use it. You can ask the issuer to reopen the account after it's been closed, but they can refuse.
How a Closed Credit Card Account Impacts You
When a credit card account is closed, even if it was rarely used, it can still have some major impacts on credit. One of the most important ways it can affect you is by causing your credit utilization ratio to spike. Your credit utilization indicates how much of your available credit you're using at any given time, and the lower your utilization, the better for your credit scores. Having a credit card account open but with no balance is beneficial since you have available credit that you're not using.
If that card is cancelled, however, you lose that available credit. And if you have other credit cards where you are carrying a balance and therefore utilizing more of your available credit, it can throw your ratio in the wrong direction.
It's best to stay under 30% utilization when possible, meaning you're not using more than 30% of your credit limit at any one time—both on individual cards and across all your credit card accounts. Keeping your utilization in the single digits is best if you want an excellent credit score.
Additionally, longevity of accounts factors into your credit score. If you have a credit card account in good standing on your credit report for years, it can improve your score since it shows a solid history. If all of your other accounts on your credit report are newer, the dropping off of a much older one can ding your score—though if the account was in good standing (meaning you paid all your bills on time), it should stay on your credit report for up to 10 years after it is closed.
How to Keep Your Credit Card Account Open
If you want to avoid a situation like mine and make sure your credit card isn't closed due to inactivity, here are a few steps you can take:
- Contact your card issuer and ask after what period of inactivity they typically close cards. That way you'll know what timeframe you're working with.
- If a card has fallen into disuse, commit to using it for one small purchase every month that you will pay off by the due date.
- To make it easier on yourself, put a subscription service you already use on the card; for example, Netflix or your phone bill. This will ensure the account is used on a monthly basis and will stay active and open.
Taking Credit Into Account
By continuing to use your card responsibly and paying it off every month, you can actually help improve your credit. Since on-time repayments and longevity of accounts factor into your score, keeping this account in good standing is beneficial, even if you only use it for small, occasional purchases to keep it active. You can also monitor your credit for free to see where you stand and to make sure your credit card accounts remain open.