I generally recommend for people to avoid cancelling credit cards in order to continue to build up their credit report and improve their credit score. However, there are certain times when it makes sense to cancel a card but only after understanding the options for a downgrade/product change or other strategic or personal reasons. Here’s a rundown of different factors to consider if you’re asking yourself if you should cancel your credit card.
The first thing is to be aware of how a credit card cancellation might affect your credit score. I suggest reading my post on how closing credit card accounts affects your credit score. There are a few key points from that article.
- The first is that you want to try to avoid closing your oldest account(s) since that’s a major factor in determining your credit history, which is also 15% of your credit score. Keeping your oldest account alive will also help you lengthen your “average age of accounts” which is another key factor for determining your credit history.
- Second, you want to make sure that if you cancel your card, you’re not going to hurt your utilization since that would likely cause the most immediate effect on your credit score (it accounts for 30% of your total credit score).
- Third, with FICO scores, after you cancel an account, your account will continue to age for 10 years. This means that if you are opening and keeping open several accounts, then a cancellation here and there will have minimal effect on your credit history even when the 10 year period is up and those canceled accounts drop off your report. But if you have a very limited number of accounts, once that account drops off, it could significantly lower your average age of accounts.
Again, for a more in-depth look at how closing credit cards affects your credit score read the article above.
Downgrades and product changes
Before deciding to cancel a card, it’s crucial to be aware of the possibilities for downgrades and product changes.
Downgrades are when you simply downgrade a version of a card to an inferior version that usually offers fewer benefits but a lower (or no) annual fee. A product change is when you convert one type of card into a completely different type of card (e.g., a Chase Sapphire Preferred into a Chase Freedom). It’s very common for banks to require you to wait 12 months before you can downgrade or product change a credit card so always keep track of your account opening dates!
Most banks offer ways for you to downgrade or product change a card with an annual fee to a card with a no annual fee. Citi is actually really good about this and allows you to even change from co-branded cards to Citi branded cards.
Other banks like Chase may limit you to product changing co-branded cards within a specific brand. For example, if you have the United MileagePlus Explorer card you’ll probably have to downgrade that to another version of the United MileagePlus card and wouldn’t be able to product change it to a Chase Freedom.
And finally, banks like American Express won’t allow you to convert a charge card into a credit card. So you wouldn’t be able to change a card like the Premier Rewards Gold Card to a card like the Amex EveryDay.
Make sure you research thoroughly on the possibilities for downgrades and product changes because I’ve been told by bank representatives on multiple occasions that they couldn’t process a requested change and all it took was me calling back and speaking to someone else to get the job done.
Also, sometimes there are “loop holes” you can use when product changing. For example, you typically need to wait 12 months to product change a Sapphire Preferred into a Chase Freedom. However, if you downgrade a Sapphire Preferred to Sapphire (normal version), you can then product change to a Freedom without waiting12 months.
Points still transferable?
Many programs limit your ability to transfer points to travel partners based on what type of premium card you hold. For example, if you wanted to transfer points to Ultimate Reward travel partners you need the Sapphire Preferred/Reserve or the Ink Plus, of if you want to transfer to Citi travel partners you need the Citi Prestige or Premier.
In addition, you need to be aware of expiration rules caused by cancelling cards. A notorious example of this is that Citi will cause your points (earned from a specific card) to expire 60 days after you cancel a card!
So make sure you that if you are planning on canceling your card you’ll still be able to transfer your points out to travel partners.
Hurting or helping your wallet?
The next thing you want to think about is how cancelling or not cancelling a credit card will affect your wallet. In other words, will it be worth it to pay the annual fee?
You need to think about if you’re getting enough value out of your credit card to make it worth paying the annual fee. And if you are getting enough value from your card, you want to then make sure that you’re getting the maximum amount of value. I’ll use the now somewhat extinct Chase Ink Plus and Cash cards to illustrate what I’m talking about.
The Chase Ink Plus has/had a $95 annual fee. If you valued Ultimate Rewards at 2 cents per point and earned 5X on office supple stores, then by spending $950 on 5X categories you’d be earning 4,750 Ultimate Rewards. At 2 cents per point, that would come out to a value of $95, meaning that you would have earned enough points to offset the annual fee. However, depending on your spending, you still might be better off with the Chase Ink Cash since it also offers 5X but comes with no annual fee. The same question could be asked of other cards like the Amex EveryDay and EveryDay Preferred, etc.
The point is to always ask yourself: 1) am I offsetting the annual fee with earnings from this card? and 2) is this the most valuable option available to me for offsetting the annual fee? If the answer to both of those questions is yes, then trying to avoid paying the annual fee likely is not a valid reason for canceling a card.
Sometimes you may need to cancel a card or not cancel a card to improve your odds of approval. Here are some examples of when that may be the case.
For Citi credit cards, you’re limited to one bonus per brand per 24 months (among other rules). In the past, opening, closing, or product changing a card has reset this 24 month “timer.” Thus, let’s say you have had the Citi Premier for 12 months and wanted to hit the bonus on the Citi Prestige soon. In that case, you may not want to cancel or change the Premier since it would force you to wait an additional 12 months to get the Prestige bonus.
Other times you may need to cancel in order to avoid being declined for too many cards issued by a bank. For example, American Express has a limit on 4 or 5 total credit cards (as opposed to charge cards with no set limit). So if you have 5 American Express credit cards, you’ll need to cancel a card (or two) to get approved for an additional credit card.
Even for banks like Chase that don’t seem to impose a hard limit on the number of cards, it sometimes might be worth just cancelling a card or two so that your total credit cards with them don’t exceed 6 or 7. Otherwise, it might get tougher to deal with recon calls when they see you’ve curated a panoply of Chase cards.
And finally, if you’re looking to “churn” and earn a sign-up bonus for the same card twice many banks will not allow you to earn an additional sign-up bonus for a card if you currently hold that same card in which case it makes sense to cancel.
I’ve seen this come up a few times where people just get tired of managing so many dang credit cards. This mostly applies to people with 20+ credit cards. It’s not always fun keeping up with different cards to monitor fraud, making sure that they stay active and that you’re not forgetting about an annual fee or some other obligation attached to the card. For that reason many people just get tired and decide to part ways with their cards. Obviously, that’s an entirely personal decision and while I don’t find it to be a burden to keep up with cards, I certainly could see how some people could get tired of it.
Overall, I say try to keep your cards open as long as possible. If you’re thinking about cancelling, always make sure you understand any potential effect it might have on your credit score, and other things like your point earning potential and strategy for applying for cards. I don’t think it’s necessarily a bad thing to cancel cards here and there, but I’d always to try to explore other options before giving the axe to a card.