Dormant Credit Accounts – Can They Hurt Your Credit Score?

It is common knowledge that credit plays a critical role in many different aspects of personal finance. Without strong or established credit, you aren’t able to easily secure the financing you may need for significant purchases, like a home or a vehicle. Landlords, utility companies, and even employers also lean on your credit history to determine if you’re a risk.

Part of this is due to the fact that there are several different factors that make up your credit history and score. From the type of accounts you have to your payment history, your credit score is recalculated often, as it is a reflection of your financial behavior.

One often overlooked aspect of the credit score calculation is your account activity – not from a payment history perspective but a use and history viewpoint. Understanding what dormant accounts are and how they play a role in your credit score is a necessary component of keeping your credit positive. Here’s what you need to know about dormant accounts and how they can hurt you if you aren’t paying attention.

What are Dormant Credit Accounts?

Dormant accounts are accounts that have no activity on record for a certain period of time. For bank accounts, this may mean a checking account that hasn’t received a deposit or withdrawal in several months up to a year or more.

On the credit side of the line, dormant accounts are open revolving credit accounts, typically credit cards and lines of credit, that have no balance and no purchases made in at least one year. While dormant bank accounts have no impact on your credit history or score, inactive credit accounts can take a toll.

Exactly when a credit account is considered dormant is up to the powers that be at the credit issuer. For instance, a credit card company could say that a card without any activity (with a zero balance) for two years or more is a dormant account. Others may put a card in dormant status at the 12-month mark of no activity. In either case, the card issuer or lender determines when an account is dormant and may close the account if it is not used.

Affects to Credit Score

Credit Age

When an account moves to dormant status, the credit card issuer is likely to close the account shortly after. Closing a credit account can have a pretty drastic impact on your overall credit score. This is because part of your credit score is based on the length of time you have had credit available to you.

Having a long-standing card with the same credit card issuer, without late payments or maxing out your credit limit, shows other creditors you are a responsible borrower with a solid track record. Closing a card with a lengthy history reduces your score because you can no longer build on that track record.

Credit Usage

In addition to messing with your credit history length, a dormant account that is closed brings down your total available credit. Credit utilization rate is yet another aspect of your credit score calculation. It is determined by adding up the total credit limits available to you across all revolving accounts and dividing the current amount you owe from that total. For instance, if you have credit balances of $5,000 and a total credit limit of $15,000, your credit utilization is 33 percent ($5,000 / $15,000).

Let’s say a dormant account is closed by your card company, and it had a $2,000 limit. You have now decreased your total credit availability to $13,000, down from $15,000. With the same $5,000 owed across other cards, your total credit utilization is now 38 percent. This higher credit utilization rate can ding your credit score by several points, and in a hurry.

That’s why it is essential to keep an eye out for dormant account notices from your credit card companies. Below are the steps you can take to keep your credit alive and well.

Tips for Keeping Credit Alive

Above and beyond staying on top of your payments for debts owed, you can use the following tips to ensure you aren’t inadvertently dinged by a dormant credit account.

1. First, keep an eye out for notices from your credit card company or other revolving account lender. Sometimes the institution will send you some form of correspondence alerting you to the fact your card is either in or about to go into dormant status, but oftentimes they won’t. You may have an opportunity to use the card before the issuer closes it for good. Depending on your financial circumstances, making a small purchase may be a good idea to keep the card alive. This should reset your dormant status to active, giving you several months to a few years before you need to use it again.
2. Next, keeping accounts as far away from dormant status is easy if you put a small recurring charge on the card each month. We all have a handful of subscription services in play; put one or two of these on a credit card to keep the account active. Plan to pay it off each month with an automatic payment if you need to, but this small step keeps accounts alive and well.
3. Finally, if a card is closed, consider how you can reduce your total credit utilization to keep that portion of the credit score calculation healthy. A debt consolidation loan may be beneficial, or opening a new credit card with a higher credit limit may work. Be sure to consider the ramifications of either option before going down that path, however.

Final Thoughts on the Impact of a Dormant Credit Account on Your Credit Scores

Your credit account history based on the time you have had an account open can affect your VantageScore and FICO credit scores with each of the three major credit bureaus, Equifax, Experian and TransUnion.

Letting accounts go dormant due to inactivity is a simple mistake that has big consequences. Fortunately, there are easy steps you can take to prevent accounts from being closed by the credit card company, keeping your credit score where it needs to be.