If you were to open up your wallet right now and look at your credit card selection, how many of the credit cards would you say you’re still using?
And out of those you’re not using anymore, how many are you paying an annual fee for?
It’s only natural to build up a variety of credit cards over time.
The list of cards and benefits and reasons goes on and on. But if we don’t weed them out from time to time, we’re liable to pay fees on things we’re not even using anymore.
Further complicating things, you might wonder if it's a bad idea to close a credit card, given the effect it can have on your credit score. So the question comes down to this:
Keep a credit card you’re not using and pay an annual fee? Or close a credit card you’re not using and potentially take a hit on your credit score?
Like all things in finance, the answer is not as black and white as it may seem. Here’s how you can decide how to handle a credit card you don’t want to use and don’t want to close.
Tip: Closing a credit card can temporarily hurt your credit score because your total available credit drops and the average age of accounts suffers slightly. Here's how your credit core is calculated.
Is An Annual Fee A Big Deal?
First of all, let’s talk about annual fees for a minute. When it comes to comparing an annual fee to a potential hit on a credit score, the annual fee might seem small in comparison.
But some annual fees can get pretty high.
One of MyBankTracker’s team members, Claire, encountered this issue with her Citi AAdvantage Platinum Select MasterCard.
She initially took this card on for its travel perks. As a frequent flyer, this card enabled her to rack up the rewards by using it to purchase her travel tickets, then use the rewards for future travel tickets and other benefits.
But suddenly the idea that she had to use a certain airline - one that came with layover-filled flights and limited travel timeframes had her rethinking the value of this card. What's worse, she was getting charged $95 to use the card annually.
A $95 fee may not seem like a big deal when you’re saving hundreds of dollars on flights (and racking up other rewards and travel benefits).
But if you’re not using the card that comes with that fee anymore, it’s no different than throwing that money down the drain.
An annual fee may only be a one-time charge per year, but that’s still money that could be used elsewhere if it’s not bringing you any added value.
What About Your Credit Score?
An annual fee is fairly easy to calculate, even when comparing the benefits it may bring. What’s not so easy to calculate is the impact closing your card may have on your credit score.
There are multiple ways card closures can impact your credit score. First, let’s look at the main factors that make up your score:
FICO Credit Score Factors and Their Percentages
|FICO credit score factors||Percentage weight on credit score:||What it means:|
|Payment history||35%||Your track record when it comes to making (at least) the minimum payment by the due date.|
|Amounts owed||30%||How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.|
|Length of credit history||15%||The average age of your active credit lines. Longer histories tend to show responsibility with credit.|
|Credit mix||10%||The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)|
|New credit||10%||The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily. Learn more about FICO credit score|
So, which of these factors gets impacted if you close your card? Credit utilization and, if this is your only credit card, types of credit.
Types of credit refers to the variety of credit products you have, such as loans and credit cards. While this is a factor in your score, it might not be a strong enough factor to pay for a credit card you’re not going to use.
Credit utilization, on the other hand, has a significant impact on your credit score. Credit utilization is the amount of money you owe on your credit in comparison to how much credit you have available to you.
Here’s how it works:
If you have two credit cards, each one with a $5,000 limit, and you owe $1,000 on one of them, then you have a 10% credit utilization.
If you were to close one of those cards, bringing you to $1,000 owed out of an available $5,000, then your credit utilization suddenly jumps to 20%.
That’s a big change for simply closing one card!
In this example, it’s not a huge deal because credit experts advise that you keep your credit utilization below 30%.
But if you have a credit card that’s nearly maxed out and then closed the other, unused credit card, your credit score is going to take a big hit.
So How Do You Choose Between a Fee and Your Credit Score?
If you review your credit utilization and realize that the percentage jump if you were to close your card is too high, you might be thinking you just have to absorb that annual fee and deal with it.
That’s not necessarily true.
In a perfect world, you can keep your credit score intact and waive that annual fee. Let’s go back to Claire’s example from above.
Knowing that she wasn’t receiving the types of rewards that she wants and therefore could no longer justify the fee, Claire called Citi.
She asked them if they would downgrade her Citi AAdvantage Platinum Select MasterCard to the Citi / AAdvantageBronze MasterCard.
The Bronze card still offered rewards, although not as many, and it didn't come with a fee.
Since Claire wasn’t using the rewards anyway, she was fine with taking on a card with less of them so that she could avoid paying a nearly $100 annual fee.
Citi obliged and Claire got the best of both worlds: a no-fee credit card and no hit on her credit score.
Tip: If there isn’t a different version of your existing credit card, ask to convert to a different card that is still available from the same card issuer.
If Claire had been in a situation in which there was no comparable card without a fee, she could have asked Citi if there was another card they had to offer that wasn’t rewards-based but also didn’t carry a fee.
Since she was a regular Citi customer with a strong payment history, odds would have been in her favor for getting a yes.
So what about you? You could certainly call your credit card issuer and ask if they have a comparable card with no fee or any other cards without a fee that they could downgrade you to.
And if they tell you no? Do some research to find a better credit card, one that will offer you the kinds of rewards that work for you - and/or one that doesn’t come with a fee.
Apply for that card and, if you get it, go ahead and close the one that you haven’t been using. If the new card has a similar credit card limit to your unused card, then your credit utilization will stay nearly the same.
If your credit card issuer doesn’t downgrade your card and you are unable to obtain a new one, consider what makes the most sense for you.
If your credit score is your top priority, perhaps keep the unused card open and pay the annual fee.
If you feel like your credit score can take a hit (perhaps you’re not going to be in the market for new loans or lines of credit anytime soon), then go ahead and close the card and work on other ways to improve your score.
You Always Have a Choice, Even When It Seems Like You Don’t
I can’t count how many times in my life I felt like I was stuck in a situation of choosing between bad or worse in my finances.
It wasn’t until I realized that I always have a choice, even when it seemed like I didn’t, that I finally learned different ways to get unstuck.
This example of choosing between paying an annual fee or taking a hit on your score if you close your credit card is the perfect example of this.
At first glance, you might think you’re stuck with the fee. But in reality, it just comes down to your top priorities.
Sometimes a fee is worth absorbing and sometimes a hit on your credit score is worth absorbing. The way you can figure out which you can handle is to focus on your financial pain points.
Would the price of that fee make a significant difference in your monthly budget when it hits?
Do you need your credit score to be in top shape because you’re getting ready to buy a home?
When you understand what’s most important in your finances and where your real financial pain points are, handling financial advice gets a lot easier.
Remember, it’s not just about what experts like us say you should do, it’s about what makes the most sense in your life, in your finances.
Always weigh the tradeoffs, the costs, and benefits, before you make a decision. And never assume that what everyone else tells you to do is the right thing.
Know where your priorities stand and make a strategy to focus on those first.
Then you’ll be sure to reach financial success no matter what kind of difficult decision you come across.