You might think not using a credit card account makes you a better borrower, because you do not need items on credit, but it can do significant damage to your credit score. While the credit scoring formula does not punish you for failing to use a credit card, letting an account go dormant affects factors that do going into credit scoring.
Identification
A nil balance never hurts your score. However, if you own a credit card you have not used in a few months, the credit bureaus probably won't consider it in your FICO score calculation. This means you lose out on extra available credit that would lower your credit utilization ratio--credit used over credit available. Most borrowers benefit from having a utilization rate of no more than 25 percent to 50 percent.
Considerations
The lender of the account will not report anything to the credit bureaus about the card, which means you lose out on positive payment history and lengthening your credit history. Also, it lowers your mix of credit accounts which is worth 10 percent of your FICO credit score. You should have a 2:1 ratio on revolving to installment accounts.
You Might Lose the Account Forever
In 2010, banks are increasing the pace at which they close inactive credit card accounts, because unused accounts cost money just by existing in a company's database. This means you could lose the account forever and any history associated with it once the bureaus stop reporting it in 10 years. If you ever want another account, you will have to apply for one, which requires a hard inquiry that lowers your score up to five points.
Tip
You only need to put a small charge on an account to keep it active, and you can pay it off every month to avoid finance charges. This may end up saving you money, because some banks give more perks to customers who use their accounts. The CARD Act of 2010 eliminated inactivity fees, so banks have to come up with new ways to motivate customers to spend on their credit cards.
0 comments:
Post a Comment