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Why Inactive Credit Cards Can Damage Your Credit Score

By sbup Staff

If you've sworn off credit cards as a way to control your spending, think twice before cutting up your plastic for good. With major credit card companies shutting down dormant accounts, your credit score could take a big hit if one of your high-limit and long-term credit cards gets terminated.

Most companies review an account that's been inactive for more than a year -- meaning no charges or transfers during that time. The reason? It costs companies just to manage an account, even an inactive one.

With credit card companies like American Express (Stock Quote: AXP), Citibank (Stock Quote: C) and Chase (Stock Quote: JPM) all looking to cut costs, they’re choosing to either impose a maintenance fee or simply close the account down, sometimes with no advance notice. "We think it is unfair, but understandable in this market," notes Linda Sherry, director of national priorities at Consumer Action, a national nonprofit consumer education and advocacy organization. "We recommend that consumers who are saving a card for a rainy day should use the card several times per year, and pay the balance back in full that month."

Keeping your card (or cards) active provides more than just a backup in the event of unforeseen expenses; it also adds positive information to your credit history. And your credit history is the first place a lending officer looks when you apply for a loan. A good credit score will help you land the best rates on loans, while a low credit score will block you from all but the most expensive ones.

Your credit score is based on a number of factors, including your ratio of debt to available credit, and the length of your credit history. Having a high limit account closed would lower the amount of your available credit, potentially pushing your overall debt-to-credit ratio above 30%. Carrying debt beyond that 30% threshold can knock down your credit score by up to 100 points or more. The impact on your score could be even larger if the inactive card is one of your older accounts -- about 15% of your credit score is based on the length of your credit history. (Find out more on how credit card debt can hurt your credit score.)

So if you’ve stashed some cards away, try to break it out every now and then for small purchases. If your card was recently cancelled, try contacting the company to see if they'll reopen the account. If they won't, consider applying for a new card in order to keep your debt-to-credit ratio at a healthy level. Or, better yet, pay down your existing accounts to reduce your debt. For the latest credit card offers, head to sbup's credit card section.

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