This is about using your card just enough times to keep it active.
Last month we received a letter from one of our credit card companies advising us that they would close our account if we did not charge anything on our card within 30 days. This card was one of our favorites for business travel. In recent years we’ve switched to a different credit card that we use for just about everything and pay off at the end of each month (we love those miles driven). It seemed like the old credit card company was not taking our absence well.
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Why does this happen
From what I’ve heard about the experiences of others, our credit card company has been kind to us. A card company is not required to notify customers before closing an account due to inactivity. My husband used the card for a $ 6 purchase at the Dallas airport and we live to bill another day – but it made me wonder why a business would close a long standing account.
The reason is the cost. An inactive credit card can cost a bank up to $ 100 a year because it has to maintain the same infrastructure and take care of whether or not every card is used. It has been a while since we paid interest on this card, or the bank collected a fee from retailers when we picked up the card at the checkout. In short, the issuer was paying for a card that earned him zero dollars. I can’t say that I blame the company for threatening to close the account.
Why don’t you want that to happen
While canceling an unused credit card might not seem like a big deal, it can impact your credit score. About 30% of your credit score is based on “credit usage” (the amount of available credit you are using). Lenders love to know that you have a lot of available credit, but they are hesitant about how much credit you use.
Imagine you have three credit cards, each with a credit limit of $ 5,000. You owe $ 4000 on one but nothing on the other two. This is a credit usage of just under 27% ($ 4,000 ÷ $ 15,000 = 0.266). 27% credit usage isn’t bad, given the rule of thumb that you should keep it below 30%.
If any of these credit cards are closed, it means you have a total credit of $ 10,000 instead of $ 15,000. This changes your percentage of use. Now, instead of 27%, you are using 40% of your available credit ($ 4,000 $ 10,000 = 0.4).
So if you don’t use your card and it’s closed, your credit usually takes a hit.
How to prevent your credit card from being closed
Here are some steps you can take to prevent a credit card closure before it happens.
1. Ask your creditors
If you have about an hour of spare time, call each of your credit card issuers and ask them how long it takes to close an account due to inactivity. For one business it may be six months, and for another it may be a year. Knowing how long you have until they get nervous gives you a better idea of how often you should use the card.
2. Make a list
Make a list of your credit cards. Every few months, use each card to make at least one small purchase. Pay for this purchase as soon as it’s posted to your account. The trick is to be super organized so that no credit card fees fall through the cracks. Set a reminder on your phone for 48 hours after making a purchase or write it in red on your calendar. Do whatever you need to remember to pay off the card in full. It can be useful to use all of your cards on the same day and pay for them at the same time.
3. Configure automatic payment – twice
Another way to keep cards active is to assign a fixed monthly bill to each credit card and set it to auto pay. For example, many of our bills are the same every month, so it would be easy to set up one card as the payment method for a streaming service, another for life insurance, and another for a regular charitable donation. Then just go to our online bank account and set up auto payment to pay off those credit cards every month.
Adding an extra task to a full program probably sounds as much fun as a root canal. Still, if it keeps your cards open and boosts your credit score, it’s probably worth it.