Picture this: You open a new cash back credit card and are really excited to start using it. You have an idea of what you’re going to purchase to get the cash back bonus. Maybe you’ve even started thinking about how you’re going to use that cash back. Dollar signs are flooding your mind. Amidst the excitement, however, you’ve got one agonizing question:
“What should I do with my old cash back card now that I have a new one?”
You realize in order to hit the sign up bonus for your new card you won’t be using your old cash back card again for a while (or maybe ever). So should you keep the card or get rid of it?
If you have an old cash back card or department store card that has zero annual fees, it would be easy to store the card away in the event you do want to use it again in the future. But if it does have an annual fee that you no longer want to pay, or you just don’t want the hassle of storing it, what are your options?
Before you go and cancel it, let’s discuss the ramifications of doing so and what other choices you have.
Is it Bad to Cancel a Credit Card?
While opening and closing credit cards quickly certainly doesn’t look good to lenders, it’s not automatically bad to cancel a credit card. That being said, your credit cards and the way you use them factor into your credit score, and that’s something you definitely don’t want to mess up. Here are some of the factors that determine your credit and how canceling a card affects them:
- Length of credit history – If the credit card you’re considering canceling is one of your oldest cards, reconsider. The length of your credit history is an important factor that plays into your credit score, as lenders want to see that you’ve been able to manage credit for a long time. If you close a card with a long history, you’ll be erasing that proof from your record.
- Credit mix – Lenders also like to see that you’ve got a variety of debt you can handle. If the credit card in question is your only card, then it’s best to keep it. This will show lenders that you are experienced with multiple types of debt, such as credit cards, student loans, auto loans, etc.
- Credit utilization rate – Your credit utilization rate is the amount of debt you have compared to the amount available to you. The lower the rate, the better for your credit score. If you close a credit card with a high credit limit, you’ll automatically be lowering your credit utilization rate.
Alternatives to Canceling a Credit Card
We now know that closing a credit card that you’ve had for a long time can lower your average length of accounts open, which in turn can hurt your credit score. We also know that if you close a credit card, you’re lowering the overall amount of credit available to you, consequently lowering your score. So what can you do?
If cancelling a credit card is going to hurt your credit score, then it’s best to consider the alternatives. There are several ways to justify keeping the credit card including:
- Review the perks – If you haven’t used the card in a while, it may be time to take another look at it. What was the reason you opened this card in the first place? Was it to obtain the sign on cash back bonus? Or was it because it had high cash back percentages in categories you shop often? Maybe both? Once you’re able to review why you opened the card and what the perks are, you may decide it makes sense to keep it after all.
- Downgrade to a no-fee card – If after reviewing your card you decide you still won’t use it enough to justify the annual fee, give the credit card company a call and ask about your options. They may waive the annual fee another year, offer you cashback or points to offset the fee, or give you the option to downgrade to a fee-free card.
If you’re nervous about calling your credit card company to discuss, consider saying something similar to this:
“Hello, I have a credit card I am no longer using and would like to discuss additional perks that may be available to offset the annual fee, or the option of downgrading to a zero annual fee card if that isn’t possible.” Typically the credit card company wants to retain you as a customer and might offer some nice incentives to pay the annual fee, or simply give you a credit to wipe away the fee.
At the end of the day canceling a credit card isn’t necessarily bad but it’s important to consider what it may do to your credit score. If you don’t have any other cards, you definitely want to keep it. Or, if you’ve had the card awhile or it has a large credit limit, you may be better off keeping or downgrading to a card with a $0 annual fee to help save your credit score from taking a hit. This will ensure you can maintain the highest score possible, helping you to continue to be eligible for more great offers in the future.
