What is a Credit Card Dormant Account?

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Credit cards are categorised as unsecured debt. A credit card can be really handy to manage finances for responsible users. Credit card transactions can definitely make life easier with ready finance, but it also puts a responsibility on card users. One of these is making sure that your card isn’t declared dormant by the issuers. Banks closed approximately 2.9 lakh inactive credit card accounts in September 2022, following Reserve Bank of India (RBI) guidelines regarding the closure of inactive cards.

In this post, customers can go through the key aspects of a credit card dormant account. First, look at key benefits that make most individuals and business owners pay using their credit cards.

Key Benefits Of Credit Card

Build credit: Credit cards can help individuals to build their credit history. Using any credit facility is generally required for building credit. Good credit history and score enable customers to get mortgages, auto loans, and/or other credit cards. Apply online with greater limits and against lower interest rates comparatively.

Universal acceptance: Banks offer credit cards for personal as well as business use with the facility being universally acceptable.

Cash withdrawal: Cash withdrawal using credit cards means making ATM withdrawals. This facility is known as the cash advance facility. It is a helpful additional feature when one needs to pay for products or services in cash.

Save on actual costs of products using rewards and cashback offers: There are several credit card options available with banks. Individuals can choose a card as per their spending habits or usage, for example, cards with fuel surcharge waiver, railway surcharge waiver, airport lounge offer, ease of expense management in your company, or any other.

What is a Dormant Credit Card Account?

A dormant credit card account, also known as an inactive account, is an account without transactions for a specific period. If the cardholder doesn't use the card within a certain period, banks can declare it dormant and close the account. Customers should note that the RBI does not consider the service charges or interest debited by the bank as valid transactions to keep a credit card account active. If customers have left their credit card lying dormant for quite some time, the card provider charges a fee for account maintenance. Generally, the account maintenance fee is deducted from the savings account linked to the credit card.

What is the Purpose Of Declaring An Account Dormant?

Dormant accounts are segregated and maintained in separate ledgers by banks. It is a step to reduce the risk of fraud using a credit card.

When is a Credit Card Deactivated By The Bank?

There is no specific duration for which a bank waits before declaring a credit card account dormant. The period varies from institution to institution. While some credit card providers deactivate a credit card after six months of inactivity, others may wait for a period of up to twelve months.

Card issuers inform the customer before deactivating a credit card and grant them a few days to reactivate the card even after an extended period of inactivity. After a time when the cost incurred to maintain an account goes beyond the revenue generated, the issuer decides to deactivate a credit card and declares it a dormant account.

When Should Customers Deactivate Their Credit Cards?

A cardholder can consider closing their credit card accounts under many conditions and save on unnecessary dormant account charges. A few of conditions are mentioned below:

Customers can consider closing credit card accounts if the issuer charges a high annual fee.
It may be that a customer has several credit cards that they do not need anymore.
Some banks issue more than one credit card with the same credit limit, and customers can deactivate one of those.
In case, the customer has a large outstanding amount on their credit card and finds it challenging to make the payment. They can opt for a balance transfer facility with a low-interest rate and close the old account.

How Dormant Credit Card Accounts Impact Cardholder’s Credit Score

A dormant account decreases the cardholder's credit score and hinders further credit options. Credit cards come with a fixed credit limit. When the user makes any purchase using the credit card, the credit limit is blocked for that transaction amount and deducted from the overall credit limit on the card. The ratio of the used limit to the total credit limit is called the credit utilisation ratio. Experts suggest individuals keep this credit utilisation ratio below 30%.

When a credit card gets deactivated, the credit card limit gets decreased from the total credit limit. It ultimately increases the overall credit utilisation ratio, but decreases the credit score.

Also, customers are not advised to close their old credit accounts. Lending institutions consider long credit history a positive sign of credibility and reliability. It increases an individual's credit score.

Also Read: Facts to Know About Loans Against Credit Cards

How to Revive a Dormant Account?

In case a credit card is declared dormant by a bank, the customer can visit the bank to reactivate the account. They need to make a request in writing to the bank. Customers can mention that they have always paid the EMIs on time and have maintained a good credit score and have a spotless credit history. The issuer may ask for self-attested copies of the Permanent Account Number (PAN) card, identity proof, and address proof. The customer needs to initiate a transaction using the credit card and can expect account activation soon. However, it depends on the type of credit card and the bank’s credit policy. The activation period also varies from bank to bank.

Thus, apply for credit cards that are useful for personal or business purposes.. Having too many can make a customer's credit profile riskier and lead to dormant credit card accounts.