In the last year, my credit score dropped by more than 30 points. And somehow, it happened because I left my credit cards at home.
Most tales of ruined credit ratings are ones of excess and irresponsible spending — spending up to your limit, making only the minimum payment, opening new accounts to handle all the excess spending, and so on. Before you know it, youre buried in debt, and your score is in the toilet.
But I hadnt done any of that. Id always considered myself the model of responsible credit usage, paying my bills on time and using less than 10 percent of my available credit. So I was shocked when I logged into CreditKarma (which offers free credit scores and reports from TransUnion) and found that my score had fallen.
Unused Accounts Had Been Closed
It didnt take long to find the culprit. Two store credit cards had been closed in the last few months. It had been years since Id used either, and the issuing banks apparently realized I wasnt planning on using the cards again anytime soon.
[Card issuers] have models that predict who has any sort of chance of coming back, explains CreditKarma CEO Ken Lin. You usually have at least a year, and if youre inactive one to three years, you run the risk of being deactivated.
For the issuing bank, its a simple cost/benefit analysis. If you never use your card, theres no chance of the bank getting its primary revenue streams of swipe fees and interest on balances. And there are liabilities involved in keeping your account open: In addition to the cost of sending you new cards and statements, theres also the risk that your card will be lost or stolen, leaving the bank liable for fraudulent charges
Credit card issuers are more focused and cognizant of the risk and revenue generated by their borrowers, explains John Ulzheimer, president of consumer education for CreditSesame.com. The days of forgetting about you and hoping you use your card sometime down the road are gone. … If your card collects dust for more than 12 months, youre almost forcing a card issuer to do something.
Utilization Is a Key Factor
Unfortunately for me, closing those two accounts had a serious negative effect on my credit score. As weve noted in the past, closing a credit card account is almost never a good idea. Much of your credit score is determined by your utilization — the percentage of your total available credit you actually use in a given month. Close an account, and you suddenly have less credit available; unless you adjust your spending downward, your utilization goes up, and the bank considers you more of a credit risk.
It also didnt help that one of the accounts had been opened in 2009, making it one of the older credit accounts in my relatively young credit history. And since the age of your credit history and the average age of your credit accounts are key factors in determining your score, closing it was a double whammy.
Build a Strong Credit History
People love to obsess about [credit] inquiries, but history is worth 50 percent more, notes Ulzheimer.
Given that, its important to start establishing credit early. Lin recommends getting your first credit card as young as possible, and going with one you can see yourself using regularly for years to come — ideally a general usage card with low or no annual fees. And even if you wind up adding better credit cards to your wallet, make sure you dont let the old standbys go unused for too long.
If your card collects dust for more than 12 months, youre almost forcing a card issuer to do something, says Ulzheimer. Buy a pair of socks.
Matt Brownell covers retail and personal finance for DailyFinance. You can follow him on Twitter at @Brownellorama.