According to a Bankrate study, a startling 57% of people don’t know that closing a credit card negatively impacts your credit score. Specifically, 15% think it has no impact, 29% said they’re not sure and 13% actually think it helps your score.
Not true. As you probably know, your credit score is partially based on the amount of available credit and it looks favorably upon long-standing credit accounts. So cancelling a card will hurt your score.
Yet 61% of credit cardholders have closed at least one card, with 37% having closed more than one card.
I’m admittedly in this camp. I’ve closed a few cards for various reasons.
I closed the Chase Sapphire Preferred card after two years because I didn’t want to keep paying an annual fee, and the Barclay’s Arrival+ card was simply better for rewards purposes.
I’m not alone in closing a card for those reasons. Seventeen percent of people — but 25% of millennials — said they closed a card because the rewards weren’t good enough. (Interestingly, only 14% of older generations were concerned about rewards quality. Instead 40% of them pointed to the interest rate being too high.)
Meanwhile, 28% of respondents said they’d closed a card due to the annual fee.
But that wasn’t a good reason for me to cancel the card. What I should have done was ask whether there was a Chase card without an annual fee that I could have been downgraded to. Doing this would’ve kept the account open, helping my FICO score, without having to pay for the privilege of using the card. I could then have put one small recurring bill on it to make sure Chase didn’t close it due to inactivity.
Worse, I later cancelled the Arrival+ card because of the annual fee. Barclay’s refused to waive it the second year, and we weren’t planning on doing more traveling in the near future. So a travel rewards card wasn’t as good as, say, my beloved Citi Double Cash Back card, which translates to cold, hard cash (or at least a nice fat check). Still, once again, I could have tried downgrading to a fee-less card.
I will at least say that I’ve never closed a card because I wasn’t using it enough or because I’d paid off debt on it. Those were other reasons the survey’s respondents gave for having closed down cards. I’d say those are the worst reasons. Well, not including the 12% who closed their accounts thinking it would help their score. (This is why we need personal finance education in schools, people!)
You should never close a card just because you don’t use it enough. Like I said earlier, just put one small recurring bill (Netflix, Hulu, etc.) on there to keep the account active, thereby keeping a longer account history for FICO purposes.
And the only time you should close a card because you’ve paid off debt is if you’re one of the people who truly can’t trust themselves with a credit card. In that case, sure, take the hit to your FICO score to save your finances.
But most people can learn good credit card habits and should keep their cards. This will mean a positive credit history and more available credit (compared to credit being currently utilized), which will help maintain a good credit score.
Of course, that’s not to say that you can’t have a good score just because you cancel a card. As I said, I’ve closed two accounts in the past two years and still had a credit score of 800 to 811, depending on which agency you checked. (Past tense because it’s likely a little lower now due to the mortgage assumption, which required a credit check, and my opening a brand new card recently.)
So don’t keep a card with a high annual fee just to maintain your credit score (unless it’s really in peril). Instead, ask the credit card company about any of those fee-free cards they might have. Companies are usually more than eager to retain you as a customer, so they’ll downgrade you without much hassle. Chase tried to convince me to downgrade rather than close the Sapphire account. I wish now that I’d listened, even if my score is still plenty healthy now.
Because it still would have taken a hit when I opened my new card — more on that in a moment — and still having that Chase or Barclay’s account open would have lessened the impact that a new card had on my score.
So now that I have my new card, I plan to keep my Ting bill on my Chase Freedom card and Netflix on my Citi Double Cash card to make sure that they stay open and I retain my account history for FICO purposes.
All the other day-to-day charges will go on… My AAdvantage Platinum Select World Elite Mastercard!
I said in another post that I want London to be my next big trip, and the welcome bonus for this American Airlines card is 60,000 miles when you spend just $3,000 in three months. That’s enough for a round-trip ticket to Europe!
And since I charge everything the card, I should have no trouble hitting $3,000 in the first three months.
There will be a $99 fee in the second year I have the AAdvantage card, but the 60,000 miles will save me hundreds of dollars, so it’s quite literally a small price to pay, especially since I’ll also have no foreign transaction fees — which I’ll need in London.
Have you closed a card? Did you know it would affect your FICO score?