Why Inactive Credit Cards Matter in Personal Finance
Managing your credit cards is about more than just paying bills on time. Many people overlook inactive credit cards, assuming they have no impact on their financial health. However, an unused credit card can affect your credit score and overall financial standing.
Whether you’re a beginner or a seasoned personal finance enthusiast, understanding the risks of inactive cards and how to manage them effectively is crucial. Let’s explore how unused credit cards affect your credit score and what steps you can take to minimize potential risks.
How Inactive Credit Cards Impact Your Credit Score
Your credit score is a key factor in determining your financial credibility. Lenders use it to assess your risk level when you apply for loans, credit cards, or even rental agreements. If you’re not actively using a credit card, you might be diminishing your credit score in several ways:
1. Increased Credit Utilization Ratio
Your credit utilization ratio is the percentage of available credit you’ve used. It’s one of the most significant factors in your credit score.
– If you have multiple credit cards and one is inactive, your total available credit is higher.
– If a lender closes your inactive card, your total available credit decreases, instantly increasing your utilization ratio.
– For example, if you have ₹1,00,000 in total credit and owe ₹30,000, your utilization ratio is 30%. If a ₹50,000 credit limit card is closed, your new utilization jumps to 60%, which can negatively impact your creditworthiness.
2. Impact on Credit History Length
The length of your credit history plays a crucial role in your credit score. Older accounts contribute to a more robust credit profile.
– Closing an old, inactive credit card shortens your credit history.
– This can lead to a drop in your credit score, especially if the closed account was one of your oldest.
3. Risk of Automatic Card Closure by Banks
Many banks automatically close inactive credit cards after a specific period, such as 12 to 24 months of non-use.
– If a lender closes your card due to inactivity, you lose that line of credit.
– It could negatively impact your score, particularly if the card had a significant credit limit.
How to Manage Inactive Credit Cards Smartly
To maintain a strong credit score and avoid sudden drops, consider these strategies to manage your inactive credit cards wisely.
1. Keep Them Active with Small Purchases
One of the simplest ways to prevent a card from becoming inactive is by making periodic small purchases.
– Use an unused credit card for necessities like grocery shopping, mobile recharges, or online subscriptions.
– Even small transactions, like ₹100-₹500, ensure the card stays active while keeping your spending in check.
2. Set Up Automated Payments
Forgetfulness often leads to inactivity. A great way to keep your credit card active is by automating small recurring payments.
– Link your credit card to utility bills, OTT subscriptions, or insurance premiums while ensuring timely repayments.
– Automation prevents unintentional inactivity while adding convenience to bill management.
3. Check Your Bank’s Inactivity Policy
Different banks have different rules for inactive credit cards.
– Some financial institutions close unused cards after 12 months; others allow up to 24 months.
– Checking your bank’s policy can help you plan better and take timely action to keep the account open.
4. Use the Card for Emergency Expenses
Keeping an inactive credit card as an emergency backup is a smart move.
– Instead of leaving it completely unused, reserve it for unexpected medical bills, urgent travel, or sudden repairs.
– This ensures the card stays available when you need it, without negatively impacting your credit score.
5. Consider Closing Unnecessary Credit Cards Wisely
If you have multiple credit cards and find it difficult to manage them all, consider closing the least valuable ones.
– Before closing a card, assess your credit utilization and history to minimize score reduction.
– If closing the card affects your credit score significantly, it might be better to keep it and use it occasionally.
Final Thoughts: Protect Your Credit Score from Inactive Cards
Ignoring inactive credit cards can lead to unexpected financial setbacks. By proactively managing unused cards, you can maintain a healthy credit score, improve your creditworthiness, and prevent unnecessary closures by banks.
Personal finance is all about strategic money management. Take control of your credit cards, review your financial habits regularly, and use available resources to strengthen your financial position.
Want to learn more personal finance tips? Explore our other guides to master credit management and build a solid financial future!