Nonactivated cards can still impact a credit score

Question for the expert

Dear Credit Score Report,
I 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

Answer for the expert

Hey 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 card.

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.

Good luck!

-- Jeremy 

See related: Think you can't use that not-yet-activated credit card? Think againTo preserve credit score, don't leave credit cards unusedCanceling a card can hurt your credit score, How your credit utilization ratio is calculated

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Updated: 12-18-2018