Inactive Credit Cards: Can an Inactive Credit Card Ruin Your CIBIL Score?

“What happens to inactive credit cards in India and how they impact your CIBIL score. Learn tips to manage unused cards, avoid credit score damage, and protect your financial health. Read now for expert insights on credit utilization, rewards, and account closure.”

In India, credit cards have become an integral part of personal finance, offering convenience, rewards, and the ability to build a strong credit history. However, many individuals often forget about old or unused credit cards, leaving them inactive for months or even years. But what happens to these inactive credit cards, and how do they impact your credit score? Inactive credit cards are a common occurrence in the financial world. Whether you have a card that you rarely use or one that you’ve completely forgotten about, understanding the implications of inactive credit cards is crucial. In this detailed guide, we’ll explore the consequences of inactive credit cards, their effects on your credit health, and actionable steps to manage them effectively.

What is an Inactive Credit Card in India?

An inactive credit card is one that hasn’t been used for transactions, balance transfers, or cash advances for an extended period. In India, most banks and credit card issuers consider a card inactive if there’s no activity for 6 to 12 months.

Here are some key points about inactive credit cards:

• Definition: An inactive credit card is one that has no recent transactions or activity. This inactivity can be due to various reasons, such as the cardholder forgetting about the card, not needing it, or having other preferred cards for daily use.
• Issuer Policies: Credit card issuers often have policies regarding inactivity. Some may close inactive accounts after a certain period, while others may reduce the credit limit or impose fees.
• Impact on Credit Score: Inactive credit cards can affect your credit score in several ways. If an issuer closes an inactive account, it can reduce your available credit, increase your credit utilization ratio, and potentially shorten your credit history, all of which can negatively impact your credit score.
• Reactivation: To avoid the negative effects of inactivity, it’s a good idea to use your credit cards periodically. Even small purchases can keep the card active and ensure that the issuer continues to report your account activity to the credit bureaus.

While it may seem harmless to leave a card unused, inactivity can have significant implications for your credit score and financial health in India.

What Happens to Inactive Credit Cards in India?

When a credit card remains inactive in India, issuers may take specific actions, including:

1. Account Closure by the Bank

Banks in India often close inactive credit card accounts to minimize risk and operational costs. According to a 2022 report by the Reserve Bank of India (RBI), approximately 20% of credit card accounts are closed due to inactivity. Once closed, the account will no longer be available for use, and you’ll lose access to its credit limit.

2. Loss of Rewards and Benefits

Many credit cards in India offer rewards, cash back, or travel points. If your card becomes inactive, you may lose any unused rewards. For example, some banks have policies that expire rewards after 12 months of inactivity.

3. Impact on Credit Utilization Ratio

Your credit utilization ratio—the amount of credit you’re using compared to your total available credit—is a critical factor in your credit score. Closing an inactive card reduces your total available credit, which can increase your utilization ratio and negatively impact your score.

4. Reduced Credit History Length

Credit scoring models like CIBIL, Experian, and Equifax consider the length of your credit history. Closing an old, inactive card can shorten your average account age, potentially lowering your credit score.

How Inactive Credit Cards Affect Your Credit Score in India

Your credit score is a numerical representation of your creditworthiness, and inactive credit cards can influence it in several ways:

1. Credit Utilization Ratio

As mentioned earlier, closing an inactive card reduces your total available credit. For example, if you have a total credit limit of ₹2,00,000 across all cards and a balance of ₹50,000, your utilization ratio is 25%. If an inactive card with a ₹50,000 limit is closed, your total credit limit drops to ₹1,50,000, and your utilization ratio jumps to 33%. Higher utilization ratios can lower your credit score.

2. Length of Credit History

Credit scoring models favor longer credit histories. If your inactive card is one of your oldest accounts, closing it can reduce the average age of your credit accounts, potentially lowering your score.

3. Credit Mix

A diverse mix of credit accounts (e.g., credit cards, personal loans, home loans) can positively impact your score. Closing an inactive credit card may reduce the diversity of your credit profile, especially if it’s your only credit card.

4. Payment History

While inactive cards don’t directly affect your payment history, closing them can indirectly impact your score by altering other factors like credit utilization and credit age.

Latest Data on Credit Card Inactivity in India

According to a study by CIBIL:

• 25% of Indian consumers have at least one inactive credit card.
• 10% of inactive credit cards are closed by banks annually.
• Consumers with inactive cards have an average credit score of 750, compared to 780 for those who actively use their cards.

These statistics highlight the importance of managing inactive cards to maintain a healthy credit profile in India.

Should You Close an Inactive Credit Card in India?

The decision to close an inactive credit card depends on your financial situation and goals. Here are some pros and cons to consider:

Pros of Closing an Inactive Credit Card

• Reduced Temptation: Closing a card can help you avoid overspending.
• Simplified Finances: Fewer accounts mean easier management.
• Avoid Fees: Some cards charge annual fees, even if unused.

Cons of Closing an Inactive Credit Card

• Lower Credit Limit: Closing a card reduces your total available credit, which can increase your utilization ratio.
• Shorter Credit History: Closing an old account can shorten your credit history.
• Loss of Benefits: You may lose rewards, perks, or a low-interest rate.

Tips to Keep Your Credit Cards Active

Keeping your credit cards active is important for maintaining a healthy credit score and ensuring that your accounts remain in good standing. Here are some practical tips to help you keep your credit cards active:

1. Set Up Recurring Charges: Use your credit card for small, recurring expenses like subscriptions (e.g., streaming services, gym memberships) or utility bills. This ensures regular activity without overspending.
2. Rotate Your Cards: If you have multiple credit cards, try to use each one periodically. For example, designate one card for groceries, another for dining out, and another for online shopping. This helps keep all your accounts active.
3. Make Small Purchases: Even small purchases, like a cup of coffee or a snack, can keep your card active. Just remember to pay off the balance in full to avoid interest charges.
4. Set Reminders: Use reminders or calendar alerts to ensure you use your cards regularly. You can set a monthly reminder to make a small purchase with each card.
5. Link to Digital Wallets: Add your credit cards to digital wallets (e.g., Apple Pay, Google Pay) and use them for contactless payments. This can make it easier to use your cards regularly.
6. Take Advantage of Promotions: Keep an eye out for promotions and rewards offered by your credit card issuer. Participating in these promotions can encourage you to use your card more frequently.
7. Use for Everyday Expenses: Consider using your credit card for everyday expenses like groceries, gas, and dining out. This ensures regular usage and can help you earn rewards or cashback.
8. Automate Payments: Set up automatic payments for certain bills using your credit card. This not only keeps your card active but also ensures you never miss a payment.
9. Monitor Your Accounts: Regularly check your credit card accounts to ensure they remain active. This can help you catch any inactivity issues early and take corrective action.
10. Stay Engaged with Your Issuer: Engage with your credit card issuer by reading their emails, checking their app, and participating in their rewards programs. Staying informed about your card’s benefits and promotions can motivate you to use it more often.

Final Thought

Inactive credit cards in India may seem harmless, but they can have a significant impact on your credit score and financial health. Whether you choose to keep the card active or close it, understanding the implications is crucial. By managing your inactive cards wisely, you can maintain a strong credit profile and avoid unnecessary setbacks.

Remember, your credit score is a reflection of your financial habits. Regularly reviewing your accounts, using credit responsibly, and staying informed about the latest trends will help you make the best decisions for your financial future in India.