In the economic world increasingly defined by digital transactions and virtual wallets, the role of credit cards in shaping credit health remains pivotal.
Keeping the same in mind, it is important to acknowledge the fact that the most effective strategy for many credit card holders may not be frequent swipes, but rather the judicious and sensible management of unused plastic.
Echoing the same idea, Mohan K, Founder of TechFini, says “Keeping an unused credit card open can actually help your credit score. It lowers your credit utilisation, maintains your credit history, improves your credit mix, and shows lenders you can access credit without relying on it. Just watch out for inactivity fees and make a small purchase occasionally to keep it active.”
The hidden power of unused credit cards
Many credit card users are of the opinion that a credit card should be used regularly to benefit one’s credit score. Still, the reality is much different. Keeping an unused credit card active especially if it’s one of your oldest accounts can significantly enhance and boost your credit health.
This happens because the length of your credit history and your credit utilisation ratio are two of the most influential factors in credit score models.
Credit utilisation
Credit utilisation is the ratio of your outstanding credit balance to your total available credit. It is a critical metric that helps in providing insights into the financial health of an individual. Now, by maintaining an unused credit card the credit card holder increases their total available credit limit, this can help you in keeping your utilisation ratio low.
Even if you use other credit cards on occasions. This approach is particularly beneficial for those who are new to credit or are planning to apply for significant loans in the not so distant future.
Preserving credit history
Closing an unused credit card can result in shortening your average credit history. This has the potential to result in a drop in your credit score. On the other hand, keeping these accounts open demonstrates a longer, stable track record of credit management.
This is a positive trait which is highly admired by lenders. It is particularly relevant in a nation where financial institutions are increasingly relying on advanced algorithms to access creditworthiness of borrowers.
Rewards, benefits, and emergency access
Beyond the influence on credit scores, unused credit cards can also provide ongoing perks such as travel insurance, purchase protection and access to emergency funds.
All these benefits are often overlooked and add value even if the credit card itself is rarely used. If your unused card charges no annual fee, there’s little downside or keeping it in active service.
Practical tips for credit cardholders
- Check your credit report consistently for errors and ensure that all accounts are updated and accurately reflected. If there are discrepancies, reach out to your respective credit bureau and try to get the problem resolved.
- Avoid cards that have a high annual fee hence if your unused credit card has a high annual fee, do consider downgrading to a no fee version of negotiating with the issuer to waive the fee.
- Do use your relatively unused credit card for a small purchase every few months. This will prevent the issuer from closing out your credit card and your credit account due to inactivity.
Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit scores. Mint does not promote or encourage taking credit, as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.