Nonactivated cards can still impact a credit score
Credit Score Report
Dear Credit Score Report,
have a credit card with my bank that allows me a $300 limit. However, I never
activated or used the card, but I can still activate it because I have an open
account with the bank. If I decide to close the credit card account, will it
damage my credit score? -- Jean
A credit card that hasn't been activated may represent a
security threat, but in the calculation of your credit score, an inactive card account's
existence -- or its closure -- is treated the same as any other credit
Banks ask cardholders to activate new cards to
prevent their use by thieves. But even if you ignore that request and stick a new card in a drawer, banks still report nonactivated accounts to the credit bureaus.
There is no special designation on the credit report for
inactive accounts; credit scoring models view them in the
same way as active accounts. "Closing
an inactive card is likely to impact the borrower's FICO score in the same ways that
closing an active card impacts a FICO score," says Barry Paperno, consumer
operations manager for FICO, creator of the most commonly used scoring model. That means "they are factored into credit utilization calculations, length of credit history and all other aspects of the
scoring formula where credit cards are considered," Paperno says.
Any open credit card -- active or inactive -- is reported to
the credit bureaus, including the card's payment status, current balance, credit limit and date opened. For newly opened accounts, that reporting takes place
"typically within 30 days from the credit card being mailed to the
consumer," says Steven Katz, spokesman for credit bureau TransUnion. Then, credit cardholders' bills are due at
some point during the month, depending on their lender. At the end of a new
cardholder's first payment cycle, the lender is able to report any new card balance
and the cardholder's first payment, says Rod Griffin, director of public
education at credit bureau Experian. In your case, "the account itself is
open and active, and would be reported as a normal account," Griffin says.
That means the bank would indicate that you have a zero balance and a
"current" (or never paid late) payment status, Griffin explains.
Despite that zero balance, closing the account might impact your credit score by changing your credit utilization ratio, which compares
your debt levels to your available credit. For example, imagine you have four
cards (including that inactive account), with each card offering you a credit
line of $300, for a combined total of $1,200 in available credit. Let's pretend
that across those four accounts, you have a total debt burden of $600,
including a zero balance on that inactive card. You then cancel that inactive
account, dropping your available credit down to just $900. Suddenly, instead of
using 50 percent of your available credit, you're now using about 66 percent. That
increased utilization ratio signals to lenders that you are a riskier borrower,
since you've gotten closer to maxing out your available credit.
Of course, leaving that account open and unused could also
impact your credit score. The bank could eventually decide to close that inactive account, which would also change your utilization ratio. Meanwhile, leaving
your account (or accounts) inactive could mean that you don't have a credit
score at all. That's because card
accounts must have been open for at least six months and reported to the credit
bureaus in the last six months in order to generate a FICO score. "While
this seems like a pretty unlikely concern for most of us, it's something to
consider for folks who decide to pay off and close their cards, and have no
other currently active credit relationships," Paperno says.
See related: Think you can't use that not-yet-activated credit card? Think again, To preserve credit score, don't leave credit cards unused, Canceling a card can hurt your credit score, How your credit utilization ratio is calculated
Jeremy M. Simon is a former CreditCards.com reporter who wrote about credit scoring, economic data, credit card crime and other issues. He is based in Austin, Texas. He is a graduate of Vassar College and has previously worked for Thomson Financial in New York City, where he wrote about the stock markets, and Texas Monthly, as well as several publications in Austin.
Published: May 25, 2010