A reader asked this week, “Since I am preparing to apply for a new credit card, should I go ahead and close out any of the cards I am not using to improve my odds of approval?” While this may sound completely logical (fewer open credit cards implies lower overall credit risk to banks, right?), the FICO credit scoring models don’t agree. Closing out credit cards negatively impacts your credit score in a couple of ways. First, closing out the card removes the credit line (often $30,000+) that your bank extended you at the time you were approved for the credit card. Overall credit line across all lenders is a significant factor in determining your credit score. Second, if the credit card you close out is older than the average age of your total credit card portfolio, this will reduce your overall age of accounts- which also reduces your credit score. Despite these potential negative factors, there are 4 good reasons to consider canceling your credit card.
Avoid paying annual fees for renewal
Credit cards come with benefits to you that cost the banks money. Loyalty points, airline miles, purchase and travel insurance, lounge access and other benefits offered to you upon sign-up are partially subsidized by annual fees that you pay. Often, the value of the bonus points awarded to you significantly outweighs the costs of the first year annual fee. However, when year 2 rolls around and you are charged its annual fee for renewing the card, there are usually no bonus points granted to you. Although exceptions exist, usually your cost of renewing outweighs the value that the card returns. If the bank offers a fee-free “downgraded card” and does not require a new application, it’s often best to select that option rather than canceling the card. Downgrading retains your credit limit granted to you by the bank, which is a leading factor in determining your credit score. If no downgrade is offered, applying the cost of the renewal annual fee towards a new credit card that unlocks sign-on bonuses not available on the subsequent years is the better option.
Open up a bank’s slot in your wallet
Certain banks, including American Express and Capital One, set a maximum limit on the number of credit cards that you can hold at one time. When a compelling offer comes available from one of these banks, cancelling one of your existing credit cards and applying for the new card offer allows you to earn additional bonus points after completing the minimum spend requirement. Apply for a new card offers the potential for many more bonus miles when compared to miles earned by holding on to a card from which you’ve already earned the sign-on bonus
Earn bonus points for applying for similar card later
Certain banks place limits on how many times you can earn bonus points for signing up for its credit cards. For example, Citibank tightly controls earning bonus miles for multiple-time sign-ups for all of its credit cards that offer similar benefits to each other. Known as the “24 month rule”, Citibank restricts earning bonus miles for new credit card signups of any card in the same product family to 1 occurrence when an account is opened or closed within a 24 month period. Closing an account will reset the 24 month clock, allowing you to earn bonus points on new card applications 24 months down the road.
Unlock incentives to retain your business
Banks strictly measure the costs incurred to acquire new customers. Estimated at $200 for each newly-acquired customer, banks have incentives to retain customers and often pass those incentives on to you to avoid losing your business and incurring costs to win you back or to replace you with a new customer While not technically cancelling your card, simply informing your bank that you’re considering cancelling your card usually results in the bank offering you incentives for you to stick around. Free statement credits, free miles, incentives to spend a certain amount within 90 days to unlock bonus miles, 18-months of 0% APR and other offers can be made available to you simply by mentioning the “C” word to the bank’s call center rep.
So while it can make sense to close out the credit card, carefully evaluate the pros and cons before pulling the trigger on canceling your credit card. Unless the incremental card benefits outweigh the costs of renewing, closing the card is usually the best option to reduce your annual fees and in certain cases prepares you for new card sign on benefits that otherwise would not be available.
What other reasons have you encountered for closing your credit card accounts?