Don't Use Your Cards Much? Watch Out for This Possible Risk

Infrequent use of credit cards can have undesirable consequences.

Credit cards can be an important financial tool. If you pay off your balance in full each month, avoid interest charges, and use your cards regularly, you can build credit and earn rewards with them.

Sometimes, however, you may have a credit card that you don't use. This could happen if the card was opened a long time ago and the bonus rewards program no longer matches your spending habits. Or it could happen if you've been focused on paying off debt and sworn off charging new purchases -- or if you keep a card only for emergencies.

While there's nothing wrong with having a card open that you aren't using often -- or at all -- there is a possible risk of doing this. Here's what it is.

Your credit score could be hurt if you don't use your card

If you have a card you don't use much, you face the possibility that the credit card issuer will close the account. Generally, this can occur if you're inactive and don't use your card for a year or more, although different card companies may have different policies on when they close down accounts.

Card companies aren't required to give you notice before closing an inactive card, although some do. Since card issuers have a limited amount of credit to extend, and they aren't making money on you if the card isn't being used, they have a lot of incentive to take action and shut down your account -- or reduce your credit line dramatically -- if your card isn't being utilized.

The problem is, if your credit card account is closed down, this could damage your credit score. That could make it harder to borrow in the future, and it could also impose challenges in other transactions where credit score matters, such as when signing up for a cellphone contract or utility services.

Why does having a credit account closed matter for your credit score?

Having a credit card account closed involuntarily by your card issuer could be a big deal because your credit score could be impacted in several ways.

1. You could lose the history of the account on your credit record

If you had a positive payment history on a card that was open for a long time, getting it shut down could do a lot of damage to your score. A longer credit history is preferred to a shorter one, although your record of payments is the most important factor for your score.

2. Your utilization ratio could go up

Your credit utilization ratio is also a key part of your credit score, and it could be adversely impacted by having an account closed. Say you have two credit cards with $1,000 available credit on each, and you have a $500 balance on one and don't use the other at all. Your credit utilization ratio is calculated based on credit used vs. what's available to you. In this case, you'd be using $500 of the $2,000 in credit available, so your ratio would be 25%.

A ratio below 30% is needed to avoid hurting your score. If the credit card that isn't used gets closed by your card issuer, then you'd find yourself with a 50% credit utilization ratio, and your score would suffer.

To make sure this doesn't happen, you'll want to use your cards at least once every few months -- even if you just make a small purchase and pay it off in full. That way, you can keep your accounts active and won't need to worry about your score taking a hit.