Points Principles: Think Twice Before Canceling Your Credit Card
You’ve opened your first travel rewards credit card, hit the minimum spend, collected the bonus miles and booked your first award ticket. Now your first impulse is to close that account and forget it. Take our advice: Not so fast.
We get it, we’ve all been there: You want to guard your credit score. But as you’ll see, canceling a credit card account can sometimes do more harm than good. This is why you should think long and hard before closing a credit card.
Watch Your Credit Score
It may seem counterintuitive, but a credit card account with a zero balance is helping your credit score. And closing an otherwise inactive account will hurt you in at least two ways.
By closing a credit card, you will decrease the amount available credit you have to your name. Let’s say you’re thinking about closing an account with up to $5,000 in credit. The moment you do, your total amount of credit decreases.
That $5,000 in credit you had is suddenly gone, making any outstanding balances you have in other accounts eat up a bigger share of your total credit. This will negatively impact your overall credit utilization, a huge factor in your overall credit score.
Closing an open line of credit will also likely decrease the average age of your accounts, another significant factor in your credit score. The longer it stays open, the higher your average account age will rise.
Thrifty Tip #1: Read more about how credit scores work here.
You’re far better off leaving that empty account open, even when you’re not actively using it, as the age of the account and the extra available credit will help improve your credit score over time. But of course, your desire to close an account may not just be based on your credit score.
Weigh Other Card Benefits
No one wants to pay a pesky annual fee for a card they’re not using. Even after you’ve cashed in on a big miles bonus, there are good reasons to keep a credit card open.
Think lounge access, travel credits, free baggage and more. There are some major perks that come with rewards credit cards that can justify keeping an account open, even if you’re not actively using the card anymore.
Further, some cards are worth keeping open just for the bonus points you’ll get on your everyday spending or travel purchases. The Chase Sapphire Reserve’s 3 points per $1 spent at restaurants and travel comes to mind, as does the unbeatable 5X points on airfare you get from the American Express Platinum Card.
These perks and spending bonuses should be part of your mental math before canceling any credit card, as they can easily outweigh the annual fee on the card.
Even if you’re just getting free baggage on your favorite airline through a co-branded credit card, it would only take 2 round trip flights a year for you and a companion to cover that $95 annual fee if you both checked bags.
If the benefits from your credit card don’t offset the cost of the fee, it can be worth considering canceling. If your card has an annual fee, you can contact the bank about doing a product conversion to a no annual fee product. This will keep your line of credit intact without costing you a dime.
Thrifty Tip #2: If the card doesn’t have an annual fee, there’s no reason to close the account whatsoever. This is helping your credit score with no out of pocket cost.
You may want to close an inactive account for the peace of mind. Unless you’re paying big fees for a card you don’t benefit from, it’s better to leave these cards open and empty.
You need to decide whether the everyday benefits the card gives you and its positive impact on your credit score outweigh the cost of the annual fee. That’s a question only you can answer.
Editorial Note: Any opinions, analyses, reviews, or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any card issuer.