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You're surely aware of the dangers of spending too much on a credit card, but what you may not know is that there can be dangers of spending too little, too.
Credit card companies have the power to close inactive accounts whenever they want, and when customers' accounts are closed, it usually hurts their credit scores.
But at what point do credit card issuers actually close accounts for inactivity? The answer can be hard to pin down.
Money reached out to major issuers of no fee cards, including Chase, Discover and Capital One to request their protocols for closing inactive accounts. They did not provide comment for this story.
Wells Fargo, however, confirmed that it does close inactive accounts. But the company says it’s not something that happens right away.
“Like other credit card issuers, we regularly close accounts that have been unused or inactive for an extended period of time, generally after two to three years depending on the card product and other factors,” spokesperson Sarah DuBois says.
Before Wells Fargo closes credit card accounts for inactivity, the company contacts customers and provides instructions for how to avoid closure, DuBois says.
But that’s not something that every credit card company does, so don't bank on getting a heads up from your issuer that your account is about to be closed for inactivity.
Issuers can close inactive accounts at their discretion
Most credit card issuers reserve the right to close accounts at any time, according to the Consumer Financial Protection Bureau.
By the time you get a letter from an issuer that they’re shutting down one of your cards, it’s often too late to stop it from happening, says Marc Lescarret, owner of Marc Alan Wealth Management.
While the idea of opening credit cards and not using them may seem counterintuitive — especially if you’re someone who uses your credit cards for daily spending — it’s actually very common.
Sometimes people open cards and don’t use them to increase their total credit limit and thereby lower their utilization ratio. Both of those things are good for your credit score.
In other cases, people will open a credit card for a specific benefit like a cash reward intro offer with no long-term intention of using the card on a regular basis. It’s also common for cardholders to stop using a certain card in their wallet when they get approved for better ones.
Regardless of your motivation for not wanting to use a card, you probably don’t want your account to be closed altogether. That's because when accounts are closed, your total credit limit will shrink. And if your limit shrinks while your spending stays the same, then your utilization ratio — a term to describe what share of your approved limit your using — will increase.
Utilization ratios are typically one of the most important factors contributing to your credit score. In other words, closure of a credit card account could really hurt your credit score, particularly if you're newer to building credit.
How often should you use your cards to avoid account closure?
Lescarret recommends using cards twice per year at a minimum to avoid risking closure, but he worries that credit card issuers are going to get more aggressive about closing inactive accounts if the economy worsens.
From the card issuers’ view, their main concern with inactive accounts is that someone will fall on hard times and start racking up debt on an old credit card that they hadn’t been using, Lescarret says. If the customer can’t pay back that debt, the credit card company will have to try to collect on the balance.
To reduce that risk, issuers close inactive accounts, and if more U.S. companies enact layoffs, or if people start defaulting on their cards at higher rates, Lescarret expects issuers to shut down accounts after shorter periods of inactivity.
“Everything is getting a little more strict with the issuers. They used to say one purchase a year would be enough, now I’m hearing twice a year. If you want to be safe, you can even do something quarterly on it,” Lescarret says.
Those recommendations probably err on the side of caution — it’s quite possible that you could neglect a card for several years or more without it being closed — but it all depends on your issuer’s approach to inactive accounts.
If you don’t want to worry about it, you could put one small recurring monthly payment like a Netflix subscription on the card and set up autopay for your bill. That will keep it active, Lescarret says.
Autumn Schinka, a financial advisor at the not-for-profit financial planning organization Thrivent, says there’s lots of variation in how issuers deal with inactive accounts.
“Some issuers will notify you about a closure after just a few months of inactivity, while others will allow it to stay open with no charges even for years before closing it,” Schinka says.
She recommends reading the fine print of your credit card to see if there’s anything in there about your issuer’s policies for closing inactive accounts. Otherwise, she agrees with Lescarret that the safest thing to do is to make regular purchases on your cards, of course, making sure that you pay the full balance each month.
Leo Chubinishvili, a financial planner at Access Wealth in East Hanover, N.J., says with certain types of cards, you don't need to make purchases very often. For example, if you open a Macy’s credit card, they may allow several years of inactivity, understanding that most cardholders aren’t going to use store cards as often as they would use something like a cash back card.
For most types of credit cards, Chubinishvili recommends using them once per quarter to avoid any stress about possible account closure.
If you’re keen on building credit though, he says it’s better to use your card at least once per month. One of the big factors that determines your credit score is payment history, which involves frequency of on-time payments. Using your card on a monthly basis and paying it off in full is the best way to improve your marks in that credit score category, Chubinishvili says.
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