Million Mile Secrets Reader, HP, tweeted:
If I need to close an AMEX card because of the annual fee, should I open a new card before or afterward so my credit isn’t affected?
Thanks for the question, HP!
Before you cancel a card, make sure you read my post about losing your miles & points when closing an account!
If you’re planning to cancel a personal credit card and sign up for another, it’s best to apply BEFORE the cancellation. Because cancelling a personal credit card can lead to a negative impact on your credit score.
I’ll tell you what you need to know to have the best chance for future credit card approvals!
This Method Will Ensure You Have the Best Chance to Be Approved for New Credit Cards!
Maintaining a high credit score is the key to getting Big Travel with Small Money. Your credit score is how banks determine your trustworthiness as a customer, and their decision to approve you for credit cards.
According to myFICO, your credit score is influenced by 5 factors:
- 35% Payment History
- 30% Amounts Owed
- 15% Length of Credit History
- 10% New Credit
- 10% Types of Credit
Cancelling a Credit Card
Cancelling a personal credit card can temporarily lower your credit score. But cancelling business credit cards from Citi, Chase, and American Express will NOT impact your personal credit score. Because business credit cards from these banks aren’t usually listed on your personal credit report from the 3 major credit bureaus.
Cancelling a personal credit card can affect the “Amounts Owed” portion of your credit score. That’s because creditors keep tabs on how much of your available credit you are using. Every time you cancel a credit card, that ratio will increase (which is bad!).
For example, let’s say you have a total of $30,000 in combined available credit across all your credit cards, and you regularly have a combined balance that totals $4,000.
You are utilizing ~13% of your available credit ($4,000 balance / $30,000 available credit = ~13% utilized credit).
But if you cancel 1 of your cards with a $12,000 credit limit, you now only have $18,000 in available credit. That means your credit utilization would be ~22%. ($4,000 balance / $18,000 available credit = 22% utilized credit).
Note: Credit cards usually remain on your credit report 10 years after you close them, as long as there is no negative information associated with the accounts. So cancelling a credit card will NOT immediately impact your average Length of Credit History!
How to Prevent a Credit Score Decrease
To keep your credit score from dipping, you must keep your “Amounts Owed” ratio from increasing.
Apply for a New Credit Card BEFORE Cancelling
I like to apply for new cards when I’m cancelling old cards, which will balance the credit limits I’m losing.
Remember, if you are applying for AMEX cards, you can only have 5 American Express credit cards at a time (not including charge cards). So if you already have 5 AMEX credit cards, you’ll have to cancel one FIRST.
And remember, you can only get each American Express sign-up bonus once per lifetime.
Transfer Credit From One Card to Another
Some folks like to try and transfer the credit from one card to another to prevent their debt-to-credit ratio from decreasing.
For example, if you have 2 Chase credit cards, each with a $5,000 credit limit, and you want to cancel 1, you can ask to cancel your credit card and combine your available credit to the other card, giving you 1 card with a $10,000 credit limit.
Note: Combining your Chase credit lines does NOT result in a hard pull on your credit score. Other banks, like Citi, WILL hard pull your credit.
This way, your credit utilization won’t increase!
Personally, I don’t do this because it’s too time-consuming for me, and not all banks allow you to transfer credit from one card to another.
If you need to cancel a personal credit card, and want sign up for another, it’s best to apply for the new BEFORE you cancel the old. This will balance out the old credit you’re losing with new credit!