TPG reader Jim wrote in with a short but important question about canceling rewards cards and what it means for your credit:
“I just wanted your opinion on whether it is better to keep credit cards open once you have redeemed the rewards, or is it better to cancel them once you feel you won’t use them again?”
There are a few things I always take into account (so to speak) when considering canceling a credit card. Mostly I ask myself, What value am I getting out of this card?
1. Perks: Am I still getting value out of the card perks, like lounge access or free checked bags? For example, I don’t charge much on my Amex Platinum card because there are other cards that give more points per dollar spent, but the perks like lounge access on Delta & American and $200 in airline charges make the card worthwhile. Same goes for my Citi AA cards – I keep one open to get the 10,000 mileage rebates on awards, which more than justifies the $95 annual fee.
2. Points: Am I accruing valuable and flexible points that I can use on multiple alliances? Furthermore, am I earning at good ratios – for example the Sapphire Preferred gives two points per dollar spent on travel and dining and the Amex Premier Rewards gives 3x on airfare and 2x on gas and groceries. See this post on maximizing category spend bonuses.
If a card doesn’t offer me compelling perks or points that outweigh the annual fee, then I will most likely cancel it.
It sounds like you’ve already made your decision on these two counts and want to go ahead and cancel your card.
If you’ve already redeemed the points or miles you earned with it, then at least there’s no chance of those points being taken away and you’re in the clear. In general, you should keep a card open for at least 6 months before closing it, or else the card company may try and clawback the points, though that is rare.
I generally don’t like canceling credit cards because it can lower your credit score. FICO score is based a mix of many different factors, and available credit and average age of accounts are two of them, so if you don’t have a lot of established credit card accounts, it might be a good idea to hang onto a card so your credit score continues to rise.
When you cancel a card, your overall credit line is lowered, potentially also lowering your credit score. There is a workaround here and many banks such as Chase are willing to reallocate credit so you keep your overall credit line–for instance if you had the Chase OnePass Presidential Plus card and the Sapphire Preferred but wanted to cancel the old Presidential Plus card, you could get Chase to move the credit line on the Presidential Plus over to your Sapphire Preferred. American Express also allows consumer credit cardholders to re-allocate their credit lines between cards.
One of the other reasons people often consider canceling credit cards is to avoid hefty annual fees. There are plenty of great travel rewards cards without annual fees, but many travel credit cards do have them, and if you have a few of these cards, those fees can get expensive fast. If you’re trying to avoid them, you can call your bank and let them know you want to cancel, but you’ll keep the card open if they waive the annual fee. Some credit card companies (like Citi) have retention teams that will waive annual fees or give big bonuses to keep you as a cardholder. Chase and Amex are less lenient with waiving annual fees, but it never hurts to ask. If they refuse to waive the annual fee, try to downgrade to a card that has no annual fee. Most card companies will prorate the annual fee when you cancel the card. If you can’t do either of the above options, or just aren’t interested, just close the account. It’s not the end of the world. However, don’t close a ton of accounts in one month because you don’t want red flags to be raised or your FICO score to shift drastically. And as always, be aware of your credit score and make sure that you are always acting in the best interest of keeping it healthy and high since good credit is the key to a great points strategy.