Don_t let Your Credit Card Accounts get Dusty

That’s right. Don’t let your credit card accounts get dusty. If you’ve got several cards that you haven’t used for a while — longer than six months — there’s a chance that they’re no longer being updated with the credit reporting agencies. If that’s the case, you could be losing FICO points. What’s more, in this credit environment, there is a good chance that a creditor will close the account too. When you sit down and give it some thought, it does make sense that inactive, or dormant, accounts are discounted in the FICO scoring formula. Here’s why: FICO is a risk-assessment tool. Lenders use the score to predict the likelihood that a consumer will default on a loan, be delinquent by more than 90 days on at least one account, or suffer a bankruptcy over the next two years. FICO figures that if you’re not using credit — which would help it measure the risk you represent — it won’t include it in the score. Which is why parts of the FICO formula completely ignore inactive accounts.It turns out, by the way, that utilization formulas completely ignore inactive accounts. Given that some 30% of your score is derived by calculating the amount of credit you’re using (link here) (in relation to the amount of available credit you have), one can see why it’s important to keep accounts active. Consider this example: You have three credit cards. Each of those cards has a $5,000 credit limit. Assume that you use one of the cards religiously, using, on average, $3,000 of the limit each month. Moreover, imagine that you’ve allowed your other cards to go inactive. Instead of FICO using all $15,000 of your available credit in its model, it now uses just $5,000, which represents the one card that you have kept active. It’s easy to see why you’d take a score hit in this scenario. As far as FICO’s concerned, you’ve only got $5,000 in available credit (it ignores the other $10,000). As a result, your utilization ratio appears to be 60% ($3,000 of the $5,000 being used) — when it should really be just 20% ($3,000 of the $15,000 being used).In the lead paragraph of this blog entry, I used the word “chance.” I italicized that word because some credit card companies, regardless of whether you keep the card active, report to the credit bureaus regularly. Indeed, I’ve got a Home Depot card, for example, that I have not used in more than a year. Yet, just like clockwork, the card gets updated each month. As a result, that card is being factored into my utilization ratio. Still, that doesn’t mean I should keep ignoring the account. At some point, there’s a strong possibility that Citibank (which underwrites the Home Depot card) could close the account for inactivity. It costs the credit card company money to administer the account on a monthly basis (plus, it costs the credit card company money each time it reports my account to the credit bureau). If you’re not using the account, the card company figures that it may as well save itself some money by closing it. I’ve had that Home Depot card for about five years. I’d hate to see it go. I think I’ll be smart and put a little purchase on the card during the next week. There’s also another potential problem that customers don’t think about. If the card company closes your account (because of inactivity), and you have amassed a bunch of rewards points, there’s a chance that you could lose the rewards. Read the fine print of your credit agreement to see how your card company handles this scenario. If you’ve been neglecting one, or several, of your cards during the past year, you might want to check to see when your creditor(s) last updated the account(s). You can do that by pulling your credit report. If you find credit card accounts that haven’t been updated in more than six months, you might consider taking the card out for a spin. After that, you should get in the habit of rotating your cards at least once a quarter. Your credit card company will appreciate it (because of the merchant fees) and your FICO score will appreciate it, too. EDIT (October 25, 2008). Since originally writing this story in July, it’s become very obvious that card companies have stepped up account closures because of inactivity. I can’t emphasize this enough: if you want to keep your cards open, be sure to use them on a regular basis. It used to be OK to use the card every six months. No more. I would recommend using cards every other month. Once every three months seems too risky in this environment. Related Articles:Heads Up: Macy’s and Citibank Closures and Credit Limit Reductions On My Radar ScreenHow Closed Credit Cards Impact Your FICO ScoreCitibank to Students: Use Your Card or We Will Shut You DownFrom the “Use it or Lose it” Department: Citibank on a Rampage with Citi Flex