It’s a good time to shop for a new rewards credit card. Sign-up bonus offers are especially lucrative at the moment, and there are plenty of new cards on the market that reward everyday spending on purchases like gas, groceries and dining. (See the best rewards cards now in Experian’s credit card marketplace.)
But once you’ve transitioned your spending from one card to another, consider your next move carefully.
“Credit scores are complex—they take key information in your credit report into account, so it’s difficult to say exactly how closing a credit card account will affect a consumer’s credit scores,” says Susan Henson, a consumer credit expert at Experian. “It all depends on what else is on that consumer’s credit report.”
While it can be tempting to simply close the old credit card altogether, doing so may have a negative effect on your credit scores. Here are some issues to consider and guidelines to follow when you face the classic credit card dilemma: cancel or keep?
Instead, ask yourself the following questions when deciding what to do with an old account:
How Will Closing an Account Affect Your Credit Utilization?
One of the main factors that goes into determining your credit scores is your credit utilization ratio, which is the amount of credit you’re using compared with the amount of credit available to you. While you need a ratio of 10% or less to get the highest credit scores, experts say keeping your credit utilization ratio at 30% or less is critical; for example, if your credit limit is $1000, keep your outstanding balance under $300.
To determine your credit utilization ratio, add all your credit card balances at any given time and divide that by your total credit limit. So say you typically spend about $3,000 on all your credit cards each month, and you have three credit cards with limits of $5,000, $2,000, and $3,000. Thus, the total credit limit across all your cards is $10,000. That means your utilization ratio is at 30%.
Say you close the credit card with the $3,000 limit, bringing your total credit limit down to $7,000, but don’t reduce your monthly spending. Your credit utilization ratio will go up to 43%—and that can bring your credit scores down. (For more information, read How Much Credit Should I Use?)
Before closing any account, calculate what your total credit limit is currently (including any new credit lines you’ve added). If closing an account will bring your utilization ratio above 30%, consider keeping the line open or reducing your monthly spending.
“Another option is seeing if your current credit issuers may increase the limits on your other cards,” says Gerri Detweiler, education director for Nav, a site that provides free business and personal credit scores to business owners. “Do this before canceling an old card.” (Full disclosure: Experian has a strategic partnership with Nav.)
Be careful, though: Requesting an increased credit limit could potentially ding your credit score as an inquiry, though this is not always the case. Don’t do this if you’re in the market for a big loan soon.
Another factor that impacts your credit scores is the age of the accounts on your credit report. The older the accounts, the higher your scores. Closing an account you’ve had for a long time could eventually have an impact on your scores.
Are You Paying an Annual Fee?
“Deciding what to do with an old card is especially a dilemma for rewards cards that carry annual fees,” says Detweiler, who says you must ask yourself the following question: “Will I get enough value to justify continuing to pay the fee?”
Say you have a co-branded card from an airline you fly often, for example. Even if you don’t plan to put your primary spending on that card, paying a $99 annual fee could be worth it if you get free checked bags and other airline perks, especially if you fly frequently.
But if you’re paying a hefty fee and not using any of the card’s perks, don’t continue to pay it just to keep the credit line open. Instead, call your issuer and ask if they can convert the account to a different card that doesn’t come with an annual fee.
“Your issuer may offer another card program that doesn’t carry an annual fee and would be easy to switch to,” says Detweiler. “I did that with an old Bank of America card, and converting to a non-fee account maintained my credit limit.”
Another question you’ll want to ask is if closing an old rewards account will cause you to forfeit any reward points you might have already accrued. In that case, you’ll want to do the math. If you must pay a $450 annual fee or forfeit points, for example, make sure the points you have remaining on the account outweigh the cost of the fee. Or make sure you use your points before you lose them.
Will an Extra Card Tempt You to Spend More?
Sometimes having an extra credit card around can tempt you to spend more money than you normally would. Curbing that temptation could be a good reason to get rid of a card altogether.
But if you’re worried about the impact of closing the credit line on your credit scores, there are other ways to keep yourself from using the card. Take it out of your wallet altogether and keep it in a drawer where you won’t see it daily. Some consumers have even taken to literally “freezing” a credit card by storing it in the freezer. You don’t have to go that far—just put it in a place where you won’t encounter it daily and be tempted to use it.
There is one caveat, however, when it comes to keeping cards open that you don’t use. Card issuers may notice that you’re not spending anything on them and close them due to inactivity. Such closures can still negatively impact your credit scores. So if you’re keeping a card around in order to maintain your credit scores, be sure to use it once in a while—just pay it off immediately to avoid any credit card interest.
“Card issuer policies about closing cards for inactivity vary, but if you want to keep a card active, make a small purchase every 12 months, then pay the balance in full,” Henson recommends.