When Do Credit Card Issuers Close down Inactive Accounts?
, by Tom Quinn
Although not everyone has a credit card, an overwhelming amount of Americans do. They use credit cards as a common means to buy goods and services.
And why not?
Credit cards are convenient and accepted almost everywhere. Many include protection against fraudulent uses and have features such as reward points or cash back. A lot of people use credit cards, and such information factors heavily into a FICO® Score.
People may have many credit cards but oftentimes use just one or two - placing the others in a drawer or in the back of their wallet.
Do credit card issuers have rules about when they will close down inactive credit cards?
If they do, do they notify the customer in advance of taking that action and what impact can it have on a FICO® Score?
There is no industry-wide policy on when to consider a card inactive and then trigger an action to close down the credit card account. Each issuer makes that determination on its own, as well as determining any communication policy about that action.
FICO® Scores still consider any historically missed payments reported on a closed account. Another area in which closing a credit card account may have an impact on a FICO® Score is the evaluation of revolving account utilization. This is a ratio that looks at how much of your available credit limits are being used. The higher revolving utilization percentage, the greater the risk.
For example, assume John had the following credit card information on his credit report:
| Issuer | Limit | Balance |
| Card 1 | $5,000 | $1,000 |
| Card 2 | $10,000 | $5,000 |
| Card 3 | $10,000 | $0 |
| $25,000 | $6,000 |
Based on this information, John is 26% utilized ($6,000/$25,000) and has two of his three cards reported with a balance.
Now, this time assume the Card 3 is marked as closed:
| Issuer | Limit | Balance |
| Card 1 | $5,000 | $1,000 |
| Card 2 | $10,000 | $5,000 |
| Card 3 | $10,000 | $0 |
| $16,000 | $6,000 |
Based on this new information, John is 37.5% utilized ($6,000/$16,000) and has each of his two cards reported with a balance. In this case, the closed status likely impacted his FICO® Scores negatively as his revolving utilization is higher, which could make him look riskier.
The closing of an account may cause the score to decrease or it may have no impact at all. It depends on the unique information regarding the closed card, as well as all the other information in your credit report.
What can you do to reduce the likelihood of being negatively impacted by a closed account?
You may consider using the credit card - even if it is a single or small purchase every several months - to show activity on the card. However, it is important to pay that small balance in full when the statement is due. A missed payment will likely have a more negative impact on your score as compared to the closing of a credit card account.
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Tom Quinn is the Vice President of Business Development for myFICO and has over 25 years of experience working with consumers, regulators, and lenders regarding credit related questions and initiatives.