Use those credit cards!
I just learned that credit cards (and HELOCs, which the credit bureaus regard as really big credit cards) go into a dormant status if unused for six months. So what? Well, dormant accounts do not count toward you credit usage ratio. That means if you haven’t used a card for more than six months, the denominator of the ratio decreases. So you’re percentage of credit being used increases. As a result, your FICO score will likely be lower than it would be if the account wasn’t dormant.
While I’m not into gaming FICO scores, it doesn’t make sense to keep credit lines open if they’re not going to count in your favor. You see the advice all over the place, “don’t close credit card accounts.” If you don’t use the card at least every six months, that’s essentially what you’re doing.
This isn’t a big deal for credit cards, but what about those HELOCs? I mean, how common and/or practical is it to buy something with one just to keep it active? I flat out don’t know because I’ve never used one.
May 11th, 2007 at 12:24 pm
[…] Use those credit cards! I just learned that credit cards (and HELOCs, which the credit bureaus regard as really big credit cards) go into a dormant status if unused for six months. So what? Well, dormant accounts do not count toward you credit usage ratio. That means if you haven’t used a card for more than six months, the denominator of the ratio decreases. […]
May 11th, 2007 at 1:40 pm
May 12th, 2007 at 6:05 pm
I don’t even own a home, so I can’t help you with the HELOC question. I guess I better start using that Target credit that’s collecting dust on my desk.
May 15th, 2007 at 7:55 am
Who cares what dormant credit cards do to your credit score? If you are really advanced in personal finance, you shouldn’t know or care what your score is anyway. As long as you run reports every once in a while to ensure there’s nothing fishy on your credit, the stupid number makes no difference at all.
If you think you might use a card, keep it. If you don’t think you’ll ever use a card, close it! Very simple. Doing things or not because of the credit score implications is like buying something for the tax write-off. The benefit of either is on the order of 1/10th of the waste of doing something you don’t need to do. If you pay your bills on time and have income that’s generally accepted as proportional to the amount you wish to borrow, you will get a good loan rate!
For instance, I have a card right now that gets me airline miles and annual companion tickets (important with 2 children). My wife opened up a second account with them (and pays a separate annual fee) not because of the 20,000 bonus miles (enough for a roundtrip ticket worth $700), but because of the second annual companion ticket. Guess what? We left that card in the envelope it came in and filed it. Will I ever use that card? Maybe to buy my next car (and then pay the bill that month), but otherwise, no. I have no idea what the limit is on it, and I don’t care. It’s probably high because we have good credit and income. As for the card we had before these 2 airline cards? Well, we canceled that one because we have plenty of available credit. Did it hurt my score? Who knows. I didn’t need the card. Done. I even have a retail credit card. Why? Because my wife likes to buy almost all her clothes from one brand of store and the reward equates to 4% cash back. Mismanaged, that award could induce more unnecessary spending, but wives don’t do that, do they?