How canceling a credit card impacts your FICO score
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Here at TPG we spend an incredible amount of time talking about which credit cards you should open, which cards pair well together and even how to build an overarching credit card strategy. An equally important topic that rarely gets as much attention is when -- and why -- you should consider closing your credit cards.
If you have credit cards you no longer find valuable, especially if it charges an annual fee, your first instinct may be to cancel that card. Your strategy for closing cards deserves as much attention as your strategy for opening them because closing accounts can potentially affect your credit score.
Closing a card could lower your FICO score
There are five primary factors that FICO uses to determine your credit score:
There are two factors that are affected when you close a credit card: your credit utilization and your credit history length.
Your credit utilization rate is the ratio of how much of your total available credit you’re using. The less credit you’re using, the better your credit score. When you close a card account, particularly one with a high credit limit, that can raise your credit utilization rate and consequently lower your credit score.
Additionally, closing a credit card could harm your credit history length. FICO includes the age of your oldest credit account, age of your newest account and the average age of all your accounts. If you close a credit card that has a lengthy credit history, that could have a profound impact on the average age of your accounts.
Related reading: How to check your credit score for free
When you should (and shouldn’t) close a credit card
This might seem rather obvious, but the only reason you should close a credit card is if you’re spending more on annual fees than you’re getting in return. Cards such as the Marriott Bonvoy Brilliant® American Express® Card are expensive (with a $450 annual fee; see rates and fees), but I get much more than that in value each year between the up to $300 in annual statement credits on eligible purchases at hotels participating in the Marriott Bonvoy program and the up to 50,000-point annual free night valid at hotels participating in the Marriott Bonvoy program (certain hotels have resort fees). This card is in my long-term “keep” pile. If I were to stop traveling and lose my Marriott elite status, I might change my mind.
If your card doesn’t have an annual fee, you should keep it open even if you don’t use it that often to preserve (and potentially even strengthen) your credit score over time. If it doesn’t cost you anything to keep a card open, you shouldn’t close it. However, you should put at least one charge on it every now and then so it doesn’t get closed due to inactivity.
Alternatives to canceling a card
Even if the math has shifted and you’re no longer getting enough value to keep a card open (or you simply don’t want to pay the annual fee anymore), there are a few things to consider before you close the account.
Downgrading to a no-annual-fee card
If your primary concern is not paying an annual fee, some issuers will let you downgrade or change your card to a version that doesn’t have an annual fee. For example, you could downgrade a Chase Sapphire Reserve to a no-annual-fee Chase Freedom Unlimited.
Each issuer has its own rules on product changes. With Chase you’ll need to wait until the account is at least a year old. This strategy is also a little harder with cobranded airline and hotel credit cards, as you’re generally only allowed to “product change” within the same family. For example, American Express offers a few no-annual-fee cards for you to choose from, but you won’t be able to downgrade your Marriott Bonvoy Amex to any of them since they’re all in different product lines.
Asking for retention offers
If a credit card issuer is giving you a welcome bonus of 50,000+ points to open a new card, they’ll want to keep your business, especially if you continue to spend regularly on your card after that three-month introductory period is over. Even if you’re 99% sure you want to cancel a credit card, it can’t hurt to ask about the possibility of an annual-fee waiver or a retention offer.
It seems crazy to think that a giant corporation is going to waive your fees simply because you ask, but it’s entirely possible. It’s like renegotiating your cable bill. All you have to do is threaten to walk away and suddenly a “new limited-time offer” is likely to appear on your account. Many TPGers have used this strategy successfully a number of times, although it doesn’t always work and you certainly aren’t entitled to anything.
Related reading: My Amex Platinum retention bonus
I find that these conversations go well if you can clearly explain to the agents on the phone exactly why you like the card. They’ll try to give you one last sales pitch before you close, so you can pre-empt them by explaining how much you love the bonus categories (be specific), elite status perks, annual statement credits and more.
You’ll need to be explicit to make sure they understand what you’re asking. I usually say something along the lines of “I love X, Y and Z perks but I’m just not sure I can justify paying the annual fee on this card for another year. I was wondering if there were any retention offers on my account, or if it might be possible to get an annual-fee waiver.”
You need to call in to cancel most credit cards anyway so the extra two minutes spent asking this question are well worth the time.
Timing is everything when you cancel a credit card
Despite all of this, there are a few instances you may want to consider closing cards you don’t use (to make way for new ones, of course). Some issuers limit the number of cards they’ll give you at any one time, such as Capital One, which only allows you to have two personal Capital One cards. On the other hand, Amex recently added additional language to the application pages for its cards, including the following related to welcome bonuses:
“We may also consider the number of American Express Cards you have opened and closed as well as other factors in making a decision on your welcome offer eligibility.”
Before you close a credit card, you should double check that you’ve maxed out every available benefit. If your card offers annual statement credits, find a way to use those up. Understand that if your card offers a free night certificate that hasn’t posted to your account yet, you’ll forfeit it by closing the card. You also should seek to maximize lesser-known perks of the card, such as the annual Saks Fifth Avenue statement credit on The Platinum Card® from American Express. Enrollment required for select benefits.
Canceling a credit card is a big decision. There is a lot to consider before doing so, including taking into account how it would affect your credit score and what your other options are. There are cases when it makes sense to close a card, and other times you’d be better off simply downgrading or holding onto the card.
For rates and fees of the Marriott Bonvoy Brilliant, please click here.
Additional reporting by Madison Blancaflor.