Don't leave credit cards unused

[Homeslice]

Dear Credit Score Report,
I have four credit cards. One for work expenses, one for personal expenses, a specific store card and then one other. This other card does not get used and has a zero balance. Does this hurt my credit score to have this credit card with zero activity? Would it hurt my credit score more if I closed this account? -- Beth

Hey Beth,
If your primary goal is maintaining your credit score, you should leave that extra card open -- but not unused.

Based on the list of cards in your wallet, I'd guess the card with zero activity is one you keep in case of emergencies. Having an emergency card is a smart move, since that plastic could come in handy when an unexpected event catches you without enough cash. Therefore, unless that extra card is causing legitimate problems -- such as charging you an annual or inactivity fee, causing excessive temptation to spend or posing identity theft concerns -- there probably isn't a good reason to close that account. After all, "a zero balance on a credit card account won't hurt your FICO score," but closing an account could, says Craig Watts, spokesman for FICO, creator of the most commonly used credit score.

If you continue not to use the card, however, the bank may cancel it for you. That's because "eventually the card issuer will close the account due to inactivity," says Watts, since keeping the account open costs the lender money. A look back over recent months confirms that lenders have been very willing to close accounts in an effort to protect their profits. Alternately, the card issuer could "begin demanding that the consumer charge X amount to keep it open," says Gail Cunningham, vice president of public relations at the National Foundation for Credit Counseling.

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Regardless of who closes the account, your credit score may fall due to a change in a key credit scoring ratio. "Closing an account causes you to lose the available credit limit associated with it. Your utilization rate, also called your balance-to-limit ratio, will increase as a result of closing the account. That may cause a temporary decline in your credit scores," says Rod Griffin, director of public education for credit bureau Experian. That's an important consideration if you're about to apply for a loan.

To get an idea of how your utilization ratio could be impacted by closing an account, let's say each of your four cards has a credit limit of $1,000, for a combined total of $4,000 in available credit. Let's also say that across those four accounts, you've got a total debt burden of $2,000. Then your unused card gets closed, taking your available credit down to just $3,000. Now, instead of using 50 percent of your credit lines, you're suddenly using about 66 percent of your total available credit. That higher proportion makes you appear to be a riskier borrower, since you're that much closer to maxing out your available credit.

Your credit score should reflect that change, although the actual scoring damage will vary from borrower to borrower. "The FICO score assesses all the information on your credit report. So the score impact from any one action, such as closing an account, will depend on what other information is present on the credit report," Watts says.

Luckily, using that emergency card even semi-regularly could prevent its closure by the bank -- and could also help your credit score in the process. For example, you could charge a recurring subscription fee such as Netflix or a monthly cost such as your cell phone bill to your emergency card. By putting such regular charges on your plastic, you "won't be actually taking on additional debt, but should keep the card alive," the NFCC's Cunningham says. Just be sure you always pay your bills on time and in full, since those two steps are necessary for building good credit. "Keeping the account open, using it to make small purchases and paying the balance in full each month is a good way to maintain your credit scores and might help improve them, especially if you've had recent credit problems," says Griffin.

If you've been a responsible borrower, it's unlikely that an account closure will have much impact. Since the most important steps for good credit involve making on-time payments, not carrying excessive debt and applying for new loans only when necessary, "then closing one card is much less likely to affect your FICO score," says Watts.