Why Inactive Credit Cards Can Damage Your Credit Score

If you've sworn off credit cards as a way to control your spending, think twice before cutting up your plastic for good. With major credit card companies shutting down dormant accounts, your credit score could take a big hit if one of your high-limit and long-term credit cards gets terminated.

Most companies review an account that's been inactive for more than a year -- meaning no charges or transfers during that time. The reason? It costs companies just to manage an account, even an inactive one.

With credit card companies like American Express (AXP), Citibank (C) and Chase (JPM) all looking to cut costs, they're choosing to either impose a maintenance fee or simply close the account down, sometimes with no advance notice. "We think it is unfair, but understandable in this market," notes Linda Sherry, director of national priorities at Consumer Action, a national nonprofit consumer education and advocacy organization. "We recommend that consumers who are saving a card for a rainy day should use the card several times per year, and pay the balance back in full that month."

Keeping your card (or cards) active provides more than just a backup in the event of unforeseen expenses; it also adds positive information to your credit history. And your credit history is the first place a lending officer looks when you apply for a loan. A good credit score will help you land the best rates on loans, while a low credit score will block you from all but the most expensive ones.