Unused, old cards can help your credit score
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Dear Credit Score Report,
Do unused credit cards have an effect on your credit rating? I have a credit card that I've had since college -- some 22-plus years ago -- that has been paid off since then. I haven't used it since I paid it off. I was told that this reflects negatively on your credit rating. Is that true? -- Stephen
Rather than having a negative impact, that credit card account's long history and nonexistent debt should actually benefit your credit score.
Perhaps you've heard that lenders have reason to worry about lines of unused credit. Banks may be concerned that access to credit could allow a cardholder to suddenly run up sizable balances -- and then default on those accounts. "The open limit does get considered for the risk that you could easily add to your debt load at any time, but it likely would be offset by the positives," says Maxine Sweet, vice president of public education with credit bureau Experian.
What are those positives? For the account you describe, the benefits include:
- More than two decades of credit history.
- A zero account balance.
Your lengthy credit history demonstrates you have experience as a responsible borrower. The "opening date shows that you have managed credit accounts for a long time and have not been tempted to overspend by using that account," Sweet says. Although you may not have used that card in years, you haven't made any late payments during that time, either. That will help your credit score. FICO -- creator of the most widely used scoring model -- considers payment history to be the most important factor when calculating your FICO score.
The length of a borrower's credit history also counts toward his or her FICO score. According to a report available to consumers at myFICO.com, most high credit scorers opened their oldest account 19 years ago, on average. With more than 22 years of credit history on that card, you're doing even better.
If flattery doesn't bother you, allow me to also commend your nonexistent balance, since not carrying any debt on that account is another positive. Scoring models look favorably on borrowers who have high credit limits and comparatively low balances -- a ratio known as credit utilization. The "open credit limit with no balance shows zero utilization on that card, which is a positive," says Sweet. "When added with all of your credit card accounts, it can offset a high utilization ratio on another card."
But even with all this praise, you can still do better. How? By occasionally charging small purchases. That's because, if the card is left unused, the bank could decide to close your account at any time. "Financial institutions now have to evaluate the way they can remain profitable because they will likely earn less in interest and penalties" on inactive cards, Sweet explains. "If they have unused accounts that are all cost and no profit, it only makes sense for them to close them and eliminate the expense of administering the card," Sweet says. Your card hasn't been used since you paid it off, so your bank may come to that same conclusion.
Since having that account open is beneficial to your credit score, it makes sense to keep it active. I'm not telling you to go out and put a bunch of charges on your plastic, however. Something as basic as a monthly membership fee or expense, such as a cell phone bill, works well. Just make sure the merchant doesn't charge you extra for paying with plastic. And, as noted earlier, to maintain a good payment history, always pay your credit card bill in full and on time each month.
Combining that approach with your well-established credit history will continue to benefit for credit scores for years to come.
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