When to Slim Down your Credit Card Portfolio
By Eva Norlyk Smith Ph.D.
August 8, 2012
How many credit cards are too many? Some can juggle more than five without breaking a sweat. For others, more than one card is a hassle.
If you want to slim down your credit card portfolio, here are some tips for deciding when and if it's time to let go of a card.
Several open accounts isn't necessarily a bad thing
Credit cards remain one of the easiest and most convenient ways to build or rebuild a great credit score. It may seem counterintuitive, but FICO scores actually reward people with multiple credit card accounts, because it is considered a sign of good credit management skills.
However, just having credit cards lying unused in a drawer won't necessarily help, either.
“If you have five cards that are just hibernating, they may do less for you than you think,” says Jeanne Kelly, author of “The 90-Day Credit Challenge: Playing the Game of Credit Scoring — Know the Rules to Win.” “The FICO scoring system likes to see healthy credit, and an account being used is considered a good sign. If you have the cards, it's better to use them, as long as you use them in a healthy way,” says Kelly
When to shut down a card
If you're unable to keep all your credit accounts active and healthy, it might be time to simplify things. When closing credit cards, however, it is important to consider the effect it could have on your credit score. While closing a card alone won't cause your score to tank, there are some situations in which you might have to do a bit of number crunching.
Closing a card might be a smart move if at least one of the following describes your situation:
- You have a credit card with an annual fee that you don't want to keep paying. For example, you opened a rewards card with a great sign-up bonus — and an annual fee that kicks in after the first year.
- You have subprime cards that you took out when your credit score was lower. If you now have credit card accounts with better terms and interest rates, those old cards could be dead weight.
- You are juggling too many credit cards, and having access to multiple lines of credit is proving too much of a temptation to overspend.
- You have no credit card debt. The main concern when closing a credit card account is the effect on your credit utilization ratio— how much of the available credit line you use. The credit bureaus calculate this ratio individually for each credit card — but also across the sum total of all your credit card limits. If you do carry credit card debt on other cards and close one card, your total credit limit goes down, pushing the total credit utilization ratio up. Of course, if you have no credit card debt and don't plan to carry balances in the future, you don't have to worry about the effect on the credit utilization ratio when closing cards.
- It's a newer card. The length of your credit history also counts toward FICO scores. So if you're thinking about canceling a card you opened recently, and you have several other cards with a longer credit record, the impact on your credit score will be less of a concern. Remember — if you carry credit card debt, you do still need to consider the effect on the credit utilization ratio.
- You are able to swap out the card. If your main objective is to get rid of a card with an annual fee, rather than closing a credit account, ask the issuer to swap out your card for a no-fee card. For example, if you don't want to continue to pay the $95 annual fee on the Chase Sapphire Preferred card, swap it out for the no-fee Chase Sapphire card. You don't even have to stay within the same “card family:” If the $150 annual fee on your American Express Delta Platinum card feels too pricey, ask if you can swap it out for a no-fee AmEx card, such as the Blue Cash Everyday card or the Amex Blue Sky card. That way, you'll keep your credit limit and get rid of the annual fee card without having to worry about the effect on credit utilization.
How to close a credit card
Before closing a credit card, be sure to zero out the balance on the card. You can do that the good old-fashioned way by paying off the debt, or if you have the option, simply transfer the balance to another card.
Once the final payment is made, confirm that the balance is zero. Make sure there are no left-over amounts from interest accrued before you made the final payment. Then simply call the card issuer and ask to close the account. Most card issuers want to hold onto their customers, so be prepared for a sales pitch. The customer service rep may offer to waive the annual fee for a year or lower the interest rate. If you've decided it makes most sense for you to close the account, just hold firm.
Finally, request that the card issuer send written confirmation when the account is closed. It may take four to six weeks for all the paperwork to get finalized, so if you don't receive the confirmation right away, don't worry. Once you receive the confirmation letter, if you want to be really sure, wait another month or two and then pull your credit reports to check that the account is correctly marked as closed.