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You’ve probably heard that opening a credit card is a crucial step to building a strong credit score. Once you have the card though, common knowledge falls short on exactly how you should be using that card.
It might seem logical that you’d get some benefit from opening a credit card and then leaving the account alone. After all, no debt is a good thing, right? Well, not exactly.
According to CreditCards.com, an unused card could actually be damaging your credit score.
In this article, we’ll look at what happens if you don’t use your credit card and some tips for responsible card ownership that will result in the best possible impact on your credit score.
But Don’t All The Experts Tell You to Stop Using Your Cards?
When you carry a balance on your credit cards from month to month, you with accrue interest on that balance making all of your purchases cost more in the long run, and you run this risk of dragging down your credit score.
Using a credit card just to pay off the balance immediately seems like an extra, unnecessary step that could be easily avoided by simply opting not to use the credit card at all.
Since most credit card companies actually want you to rack up interest charges, they don’t work all that hard on informing consumers about responsible card ownership. So, how exactly should you be using this card?
If you’re looking to build a good credit score, you’ll need to start using your credit card in a very specific way. Meaning, you actually have to use the card. Abandoning your credit card could cause a domino effect of disastrous events, ultimately damaging your credit score.
How often you use the card, how much you charge to it, and the frequency with which you pay off your balance can all have a big impact on that all-important credit score.
How Does Your Credit Card Impact Your Credit Score?
According to Experian, your credit card has an impact on several different factors that go into determining your credit score. The most significant of these, however, is your credit card’s contribution to a category called “credit utilization.”
Credit utilization measures the amount of money you owe versus the amount of money you have access to.
To calculate your credit utilization ratio, divide the balance on all your credit cards by the total credit limit you have available to you and multiply by 100. For example:
If you have a credit card with a $5,000 limit and have a balance of $2,000 on that card your credit utilization ratio would $2,000/$5,000=0.4*100=40%
Aside from credit utilization, your credit card can improve or detract from other factors that go into your credit score, too.
How Is Your Credit Score Calculated?
Your credit score is calculated combining data from across your finances to come up with a final, overall measure. Each credit bureau has a slightly different calculation, so you could very well end up with more than one credit score.
MyFico reports that your FICO credit score is based on:
- 35% payment history
- 30% credit utilization
- 15% age of credit
- 10% mix of credit
- 10% on credit inquiries.
Your credit card issuer reports to the agencies at a variety of different times and frequencies. The values that drive your credit score are the exact values on your card on the specific day the report is sent out to credit bureaus.
This means that even if you do pay off your balance every month, if your credit card company reports to one of the major credit score institutions before your payment is processed, you could end up with a score that doesn’t seem to reflect reality.
The Impact of Credit Utilization on Your Credit Score
So, if your score can be updated at any time and not using your card isn’t an ideal solution, how much credit utilization is ideal?
NerdWallet interviewed Rod Griffin, the Public Education Director at Experian and uncovered the fact that, apparently, there is no ideal credit utilization rate. If you browse around the internet for advice, you’ll find a common number floating around: 30%.
But, dig a little deeper, and you’ll find that consumers with the best credit scores—800 and above—average just a 7% credit utilization score.
If your goal is to max out your credit score, it stands to reason that you can learn something from the people who seem to be doing things right. Keep your credit utilization rate under 10%, and you’ll be in some very savvy company.
A low or nonexistent credit score can make it very difficult to buy a car, get a loan, even secure an apartment. If you’re just starting out, check out these nine pieces of advice on how to get an apartment with no credit history.
This is What Happens If You Don’t Use Your Credit Card
If a lower score is a boon when it comes to calculating your creditworthiness, it seems counter-intuitive opting out of using your credit could be a bad thing.
Unfortunately, not using your credit card doesn’t actually result in a 0% score. More than likely, it will result in no score at all.
What happens if you don’t use your credit card? The short answer is: nothing good. Your card issuer will likely stop reporting to the credit bureaus, which will omit that card from your mix of credit, your credit utilization, and your payment history factor.
Worse than that, your credit card company will eventually close your account, which will result in a significant drop in your credit score.
Almost every factor that goes into calculating your score will suffer a drop, and there is not much you can do to recover from that drop in the short run.
If your credit card company does close your account, you probably won’t get a warning or even a notice informing you of the decision.
How Can You Keep Track of Your Credit Card Usage?
To prevent a card from going unused, use a third-party management platform like Tally to see all your account data in one place.
Tally is an automated debt manager that can remind you to use your card on a regular basis and help you pay off the balance on your card as soon as you incur it.
Apps like this help you manage your credit score and your debt so that you always know what to expect from your credit score.
Speaking of apps, check out our top 10 best apps for managing your personal budget. When you use Tally in combination with a budgeting app, paying your bills on time and boosting your credit score becomes a breeze.
Should You Close an Unused Credit Card?
By choosing not to use your card, you put yourself at risk of a closed account, a dock to your credit score that lasts years, and no access to a line of credit for emergencies. So, it’s best to keep your card active through occasional use.
But, if you’re not using the card at all, should you then close the account on your own, before the credit company does it for you?
The reality is that it’s going to be hard to close out a credit card and not suffer some kind of drop in credit score.
Bankrate makes a case for why it’s, more often than not, better to keep your credit cards open. The penalties that drag down your credit score are very often not worth the closing of a card.
But, if your card has high annual fees, you might be willing to take the hit to save yourself some money but think on the choice carefully.
According to Lexington Law, “most negative items will remain on your report for seven years at the most due to the regulations set by the Fair Credit Reporting Act. Bankruptcy, on the other hand, can last up to 10 years or more in some cases.”
How to Use Your Credit Card to Improve Your Credit Score
If you can’t close the account and you can’t carry a balance on it, what should you be doing to build a healthy credit score?
1. Don’t Carry Debt On Your Credit Card.
Get into the habit of make a purchase and paying off the card after every purchase to reduce the risk of your card issuer reporting a balance to the credit bureaus.
2. Keep Your Credit Utilization Under 10%
Based on the consumers with the best scores, a lower credit utilization rate is better. Functionally, that means you shouldn’t be spending more than 10% of your credit limit.
3. Use Your Credit Card Regularly
Use your card often enough to keep your account active. A good way of doing this is to have a few monthly expenses—like your cell phone or cable bill—charge directly to your credit card and then pay off the purchases right away.
You can automate the bill payment to both your utility provider and your credit card company.
4. Only Apply for a New Credit Card if You Absolutely Need It
Prevent credit inquiries from dissolving your score and reduce the risk of inflating your access to credit by keeping your open credit card accounts to a minimum.
5. Don’t Close Unused Cards
Use the cards that you do have responsibly and opt to use them for minimal purchases instead of closing them.
So, What Happens If You Don’t Use Your Credit Card?
Ultimately, when you don’t use your credit card, you run the risk of triggering a serious of events that could drag down your credit score and prevent you from getting approved for a mortgage, a business loan, and even jobs.
Use the cards you have regularly and responsibly to preserve and build your credit score. Managing your accounts sounds harder than it actually is, and there are apps out there that make it a breeze.
If you’re looking to cut back on your credit card usage to help you get out of debt, check out these 67 practical tips on how to save money fast so that you can pay off your debt quickly.