Does Canceling an Unactivated Card Hurt Credit Scores?

Dear Opening Credits,

What will happen to your credit score when you apply for a credit card, you get approved and the credit card is sent to you, but you never activate it and never use it? The reason why I never activated the credit card is because the credit line is very low ($400) and the annual fee is very high ($99).

- Lilyana

Dear Lilyana,

The credit card that you applied for and have now received is an open account. It doesn't matter that you never called the number on the back of the card to bring it to life or have yet to make a purchase with it. To the credit issuer -- and the credit reporting agencies -- it's good to go.

Now that you've taken a closer look at the terms, however, you would rather not have the card at all. I can understand that, as the credit line is on the low side and would not have afforded you much flexibility to charge the things you may need. The annual fee is also quite high compared to that limited borrowing power, too. Had you read about the terms beforehand, you probably would have rejected them before they accepted you.

So pick up the phone and call the credit issuer immediately to tell them you've changed your mind. If you cancel the account fast enough, you may be able to escape paying the annual fee. As long as the account remains active, however, it will be used in calculating your FICO scores.

FICO scores are the most commonly used of all credit scoring models, and they take into account all the credit information that appears on a consumer's credit file. Some of the data carries greater weight than others, though. Here's how a new credit card -- whether you close it or keep it open -- affects your scores.

When you completed the application, the issuer checked your credit history to see if you qualified for the product. This action prompted an inquiry to appear on the three major credit reports, Equifax, TransUnion and Experian. Even if you had been denied your request for credit, evidence that you gave it a whirl would show up. Such inquires -- also called hard pulls -- result in a temporary ding to your credit score. Still, I wouldn't worry about that too much. Inquiries make up just 10% of a FICO score, and though they remain on a report for two years, they are only factored in for a year.

As for the other scoring factors, Payment history is the most important, as it comprises 35% of the score. Assuming you never charge with the card, there will be no payment history to assess. The next weightiest is amounts owed, at 30%. You will have an available balance while the card is open, which is part of this category, but when you close it that ceases to be a factor. Because you did open (and shut) it, the card will be included in the length of credit history category, which is computed at 15% of the score. Types of credit used, which is the last category, at 10%, won't be included in the score after it's inactive.

I can't tell you exactly how much or how little damage canceling the card will do to your credit since I am not privy to your current credit score and reports, but I wouldn't worry about it too much. If you are trying to rebuild a poor credit score, I would suggest trying a secured credit card (where you put a deposit down to secure a credit line) with no annual fee for a year or so. Use that card responsibly by charging small items and paying them off on time every month.

In the future, save yourself all this unnecessary trouble! Only apply for the best credit card that you qualify for and that you really want. You can do that by researching the current credit offers for people with the type of credit rating that you have. Identifying and obtaining the perfect plastic for you can take a little time, but it's an effort that will pay off in the long run.