Maintaining a Credit Card: When to Use, When to Ignore

Often, the question arises among credit card holders about whether it is better to have an active credit card or to keep one but never use it. Both approaches can impact your credit score in different ways, and understanding these implications can help you make an informed decision.

Impact on Credit Score

One common perspective suggests that it makes no significant difference whether you use your credit card or not. As long as you pay your bill on time and in full, the overall balance doesn't matter much. However, having a credit card and not using it can still affect your credit score in subtle ways.

Maintaining an Active Credit Card

Although the card issuer may not cancel the account for an extended period of inactivity, the FICO scoring model prefers some level of activity. To keep your score healthy, you should use the card occasionally. For example, make a few purchases a year and then pay off the balance when your statement arrives. This practice ensures that you maintain a positive historical pattern and avoids accruing interest.

Impact of Annual Fees

For cards with annual fees, the decision becomes more nuanced. You should evaluate if the benefits of the card outweigh the cost. If the card offers rewards or cash back, determine your minimum spending to cover the annual fee. Once you reach that threshold, ensure you pay the full balance every month to avoid additional charges. If the benefits are not substantial, consider canceling the card to avoid paying the annual fee.

Account Age

Aging accounts are a critical factor in your credit score. Keeping old accounts open helps maintain a longer credit history, which is beneficial for your overall score. Conversely, closing old accounts can lower your average credit age. Therefore, if you have an unused but annual fee-free card, it's better to keep it active, even if it's just making occasional purchases.

Credit Utilization

Credit utilization is another significant aspect of your credit score. Having an unused card with a high credit limit can still positively affect your overall credit utilization ratio. This limits the amount of available credit you could potentially use, giving you a lower utilization rate. Even if you never plan to use the card, the presence of a high credit limit can be viewed favorably by credit scoring models.

Account Inactivity and Maintenance

While unused cards can provide a positive impact on your credit score due to the high credit limit, they can also be closed by the issuer. To prevent this, use the card periodically, such as every few months, to keep it active and maintain the goodwill of the credit card company. This activity can help protect your credit history and avoid loss of positive credit data.

Annual Membership Fees and Upgrades

Avoid paying annual fees for cards you rarely use. If you have a card with an annual fee, consider whether the benefits justify the cost. If the card offers rewards, calculate the minimum spending required to offset the annual fee. Once you reach that spending level, pay the balance in full each month to avoid interest charges. If the card lacks upgrade paths or benefits, you might be able to waive the fee for the current year. Otherwise, it may be wise to consider canceling the card to avoid unnecessary expenses, even if it slightly hampers your credit score.

In conclusion, keeping an unused but annual fee-free credit card open can be beneficial for your credit score. Just make sure to keep the account active by using it occasionally. For cards with annual fees, weigh the benefits against the cost and consider whether to keep or cancel the card based on your usage.