Canceling an existing credit card and opening a new one seems pretty simple, right? Well for the most part it is, but there are some things you should know about the ding your credit score takes when you start eliminating available credit. As your credit score and history improve, at some point you will probably qualify for a better card. In fact, you may be paying an annual fee for your current card and want to replace it with a no fee credit card or you might want a card with a lower interest rate. Whatever the case may be, there is one important step you should take before canceling your card. Apply for the new card first!
When you cancel a credit card it can actually hurt your credit score. The reason is because one factor that goes into a FICO score is the amount of available credit you have. Generally, the more available credit the better your score. If you cancel your card you are reducing the amount of available credit which ultimately could lower your score and potentially make it harder for you to get approved for a better credit card offer. Especially now a days with the credit card industry not so freely lending money like it use to, having the best credit possible is only going to benefit you and get you the better offers. If you open the new account before closing the old one your credit score will take a hit when you close your old card. However, if your on top of your credit by paying your bills on time then it will not be a big hit to your credit. Most likely just a few points. Here’s how it works – the length of time that you have had your credit cards amounts to about 10% of your FICO score and closing a card will factor into that. Obviously, when you go to open the new account you want your credit score to be as high as possible and for some of us a few points could be the difference in being approved or not. It makes the most sense to have your credit score as high as possible before applying, that way you have the best possible chance of getting the card you want.
Once you get your new card, then you can decide whether to leave the old account open or you can choose to cancel the account. Also you should think about if you plan to carry a balance on your new credit card or not. If so then it might be beneficial to leave the old card open with a zero balance. This is because the amount of your overall credit limit you use has a large impact on your credit score: 30%. If you leave the old card open with a zero balance, this will keep your debt-to-credit ratio low, and it will actually increase your credit score. However, if you plan on not carrying a balance on the new card, then canceling the old hard will cause no harm. The small drop in your credit score will most likely fix itself since you will continue your good credit habits.
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