Canceling a credit card/credit score question

[GoudaBrew]

I have a credit card that I never use anymore. I got this card when I turned 18 (26 now) and don't use it anymore because my other card has reward points and this one does not. The card has 1 yearly auto-pay on it (MLBTV) otherwise it just gets stored away in my wallet. Well, I just got a letter the other day that the bank is going to start charging a $20 annual fee for the card. Since I never use the card I'd much rather just cancel it than pay the $20 annual fee. However, I've heard that canceling a credit card will hurt your credit score (due to debt to available credit ratios). Is this true? I could open up another card with better reward points and no annual fee to increase my available credit as well. Suggestions?

[chadomac]

I'm by no means an expert when it comes to this stuff - so hopefully some other people can back me up or tell me I'm wrong about this, but yes - short-term at least - closing an account will hurt your score at least a little bit because the score is based on amount of credit you have available to you at any given time vs. the balance you carry on that credit.

 

 

So an example of someone with excellent credit would be someone with $8000 worth of credit but not carrying a balance at all. If that person was to close a card/account of theirs with a $2000 credit limit they would then have $6000 credit available to them and no balance at all... but their previous situation would reflect a better credit score.

 

 

I have very good credit and have closed off multiple accounts that I never really used... and I still have a very high score... so I'm going to guess that over time you recover from that hit you take by closing a card.

 

Unless you plan to buy a house in the next few months or some other type of situation where you need as high of a score as possible... don't keep that card open and start paying an annual fee just because you're afraid of a dip in your score. If you're really that worried, open a different account like you said and that should balance it out.

[Gone]

The largest factor in your credit score is your pay history (makes up 35%) and surprisingly to many the next largest is your availability (30%). The availability factor in your score isnt based on the $ amount available, rather the percent available. Someone with only a $100 credit card with zero balance will have 100% available, the same as someone with a $1,000 credit card w/zero balance. The less your available (%), the lower your credit score. This is a huge part because the scoring modules look at someone who spends to their max capacity as a larger risk than one who does not abuse their available lines. A person who is living in the 0-10% available area is generally living on inflated income. 1% available can equal as much as 1 point on your score.

Other factors in your score are how long you've had credit open, and how many major credit cards (Visa, MasterCard) you have. If you have 5, that's about perfect. These factors only make up 5-10% of your score though.

In most cases, I recommend to people never to close their credit cards... unless they have an annual fee. It sounds like this is your first ever credit card, so it likely will drop your score a bit by replacing the card with another with the same limit, but I'd recommend doing that, unless you're ready to make a major credit transaction.

In my job I've seen close to a million credit reports. None are the same, but if you have on time pay history over the last 3+ years and 80% + available on your credit cards you're likely going to be over a 700 credit score and going to have no problem getting very good rates and credit when needed.

[dadofandrew]

They might drop the fee if you call and ask.

[Invader3K]

How is your credit score right now? Canceling one card shouldn't really hurt you that much beyond the short term. Paying an annual fee on any credit card is rather silly, even if it's just $20/year.

 

Dave Ramsey says, "Don't worship at the altar of the great FICO."

[FVBrewerFan]

Good suggestions. I would call that credit card card company and try to waive the fee. Another option would be to call your new credit card company and ask that your credit limit be raised. That should help your credit available/credit used ratio and make up the difference for canceeling your other card. Finally, as others have said, it shouldn't affect your score very much at all as long as you're paying bills on time and have other credit cards available.

[temke]

They might drop the fee if you call and ask.

this is definitely worth a chance...especially since you have been a cardholder for a fair amount of time...even if you dont use the card much. the worst they can do is say no then you cancel.

[GoudaBrew]

They might drop the fee if you call and ask.

Yeah, I should have thought of this. I called them this AM and they waived it immediately. Problem solved!

 

Thanks for all the great info, all!

[davego]

Ditto the Dave Ramsey thought.

[mothershipconnection]

Looks like a simple call worked for you. I always advise my friends to call and ask them to drop nonsense like this. I've gotten by on this sort of thing many times, and I'll reveal my secret strategy. I call the company and tell the person "I know you'll cave in to a raving, hysterical lunatic, so I'm gonna be really nice, you'll cave in like I'm going crazy, and we both win. You don't have to deal with an angry customer, and I don't have to act like one". I swear that this has never failed me on reasonable requests. On things that are pure profit for the company, they typically have quite a bit of wiggle room.

[GAME05]

i'm gonna steal that line for the future. i recently learned that trick with my bank. for two weeks i wasn't aware that i'd been overdrafting my account, so i had quite a few $2 charges that had a $35 fee attached to them. whoops. but i called and the bank put it through some formula and canceled 40% of my fees.

 

interesting fact about the available credit percentage, thanks. i just finished two years of school, so i'd only guess my credit is in the single digits. guess i'll have to hold off on that house:)

[craigharmann]

Dave Ramsey says, "Don't worship at the altar of the great FICO."

Agreed. Other than buying a house, there really is no need to use credit. The whole "reward" or points thing is silly, because you're spending lots of money to get a minimal reward. Pay cash, save your money and live within your means. Common sense that would probably do us all a whole lot of good.