Many credit cards carry an annual fee which is waived for the first year. After the first year, the question still remains – should you keep that card open or cancel it?
There isn’t any one right answer, and it largely depends on the card and your preferences. However, I do believe there are certain guidelines that should be followed when making the decision. I’ll try to explain those guidelines in this post.
Does Cancelling a Credit Card Affect Your Credit Score?
Most people have been warned that credit card cancellation can result in a much lower credit score. This idea is blown way out of proportion. Cancelling credit cards will never improve your credit score, but it won’t hurt very much either. If you’re smart about the process, it might not hurt at all.
I previously described how your credit score is often improved through the opening of new accounts, but I didn’t talk about how closing cards can affect things.
Recall that you credit score is primarily determined by the five factors shown below. Closed credit cards can impact your credit score in the following ways:
- 35%: Payment history – Payment history matters for open and closed accounts. Good payment history will continue to help your score, while negative payment history will continue to hurt your score even after the account is closed. The impact of payment history lessens over time, and the payment history will eventually fall off your credit report and no longer be part of your credit score. Negative payment histories last for 7 years, and positive payment histories are reported for roughly 10 years. Closing an account won’t hurt your payment history directly, as long as you pay your bills on time.
- 30%: Credit utilization – This is the one factor that can can be most directly impacted by cancelling credit cards. The utilization ratio is the amount of credit you use divided by the total credit extended to you over all accounts. Lower utilization results in a higher credit score. Higher utilization results in a lower credit score. If you cancel a card without moving the line of credit to another credit card, you lose some extended credit, and therefore increase your credit utilization. If it’s a large change, your score can drop.
- 15%: Length of credit history – Most people fear that closing an account will lower their average age of account, or overall length of credit history. This is actually not true. Your closed accounts remain on your credit report for 10 full years, as mentioned above with payment history. Closed accounts will fall off at the 10 year mark, but it shouldn’t matter. You’ll continue opening new accounts and will keep some older, no-fee credit cards open forever. These accounts will age your credit history further and diminish the impact of those closed accounts.
- 10%: Types of credit – Not impacted if you have other credit cards that remain open.
- 10%: Recent searches for credit – Not impacted by closed accounts.
Basically, credit utilization is the only factor to worry about here. There are ways to minimize this impact which I’ll share below.
Keep or Cancel?
I like to ask myself a few questions when deciding whether to keep or cancel a specific credit card.
1) Does the card have an annual fee?
If the answer is no, you can keep the card open and let the account age or close it.
If the answer is yes, keep reading.
2) Are the specific card benefits worth more than the annual fee?
There are certain cards that are worth every cent of the annual fee. The IHG hotel card comes to mind (See Comparison Here). If the card has annual perks that outweigh the fee (such as the free night at any IHG property), or you favor using the card for a great deal of spend (The Chase Ink earns 5x for many bills and at office supply stores), you might elect to pay the annual fee each year.
If you aren’t sure, or you know the fee isn’t worth paying, keep reading.
3) Is there another credit card offering similar benefits and/or a large sign-up bonus?
If there is a similar card on the market that has a lower annual fee or better rewards, close the original account.
Before canceling, consider one more thing:
4) How long have I had the card? Is it worth keeping open to preserve the history of the account?
If you have held a specific credit card for many years, but decide that it’s no longer worth keeping open, you might want to consider the age of the account. This is usually only worth thinking about if you’ve held the card a very long time, since each account stays on your credit report for a minimum of 10 years.
If you want to preserve the credit line and your long account history, you can attempt to downgrade the card to a version without annual fee. Then just hold the card open indefinitely to maintain the relationship.
Other Important Considerations
There are a couple of other things that I consider before making the final decision to keep or close:
1) Can the card be opened again?
If you aren’t using a card much and want to close it, make sure it is still available for new signups. Some credit cards are discontinued and only legacy members continue receiving the benefits or rewards.
2) Do you have too many cards open?
Some issuing banks (Amex is a great example) will not issue an unlimited number of credit cards to you. It depends on your credit score and the issuing bank, but some will deny applications if they deem that you have too many open cards.
One way to help prevent that occurrence is by closing accounts that will not be used. You can often transfer the credit line to another card issued by the same bank before closing an account.
How to Properly Close a Credit Card
If do decide to cancel a card, you should call the issuing bank 2-3 months before the annual fee will hit. Go ahead and tell them that you are thinking about canceling because you aren’t sure the benefits outweigh the annual fee.
Many times you will be transferred to another department focused on customer retention. The supporting agent will ask a few questions and sometimes offer a retention bonus to keep the card open. This can be another annual fee waiver, or certain perks for spending x amount within x number of months. Sometimes they won’t offer you anything.
The reason to call 2-3 months before the annual fee is that you can try again if the first attempt is unsuccessful. Just call again a month later and try again. Sometimes they’ll offer something new. Sometimes they won’t. Sometimes you can get retention offers on both calls. Whatever the case, decide if the offer is worth keeping the card open.
If they offer you nothing at all, decide if it’s time to cancel or downgrade based on the criteria mentioned above.
If it’s time to cancel, consider transferring your credit line
Most banks will only issue you a certain amount of credit. Once you hit that limit, you will be denied future lines of credit, and thus be forced to move credit around from existing accounts. When you cancel a card, you forfeit the line of credit that was extended to that card. Banks won’t reissue that canceled line of credit for a period of time, meaning you have less available credit until they release that line back into your “pool” of available credit.
One option is to transfer the credit line before cancelling. Some of the issuing banks will allow you to shift credit from one card to another before cancelling. Others only allow that when you apply for a new card. So it’s common practice to apply for a new credit card issued by that bank, and then request the credit line shift during the application process, and then cancel the old card with the reduced credit line.
The easier option is to just cancel when you want, and not worry about the line of credit. Some believe this to be a superior option, because transferring the line of credit means less available credit to draw from on future credit card applications.
If it’s time to cancel, don’t lose your points!
Chase Ultimate Rewards, American Express Membership Rewards, and Citi ThankYou Points are all tied to whichever credit card earned them. If you cancel one of these credit cards without transferring the points, you will lose them forever. Make sure to transfer to one of their transfer partners, or transfer to another card.
For example, if you had the Chase Sapphire Preferred and want to cancel, you could transfer to any of the Ultimate Reward partners (BA Avios, United Airlines, Hyatt Hotels, etc.) or you could transfer the point to another Chase card that you have open. But if you transfer to another Chase card that doesn’t have the annual fee (i.e. the Chase Freedom), you lose the ability to transfer to the partners I just mentioned. It’s a lower level card and you can’t transfer points until you get another premium card. Crazy, right?