When I tell people that I credit card hack/travel hack (whatever you want to call it), the first kick back I always get is that doing so most surely will kill my credit score. So I think it is finally time to debunk this myth.
Why Close a Credit Card?
So the first question to address is why would one need to close a credit card? We are told that the age of credit is a factor in our credit score. So why would we want to cancel a card which will most certainly lower this metric?
We want to cancel because with credit card hacking, we are often opening multiple cards per year that often have an associated annual fee. We pay this fee so that we can access the large points/reward bonuses that accompany them. The points we target usually offer $700 to over $2000 of value as with the Southwest Companion Pass.
So right away the annual fee is covered by the value of the card. And sometimes the annual fee is postponed until the next year as with the Capital One Venture Card, so in this scenario it is all gains.
However, when the card anniversary starts to approach, there really isn’t a benefit to continue paying the annual fee for most credit cards. There are some exceptions, but for most cards, we have already earned the large bonus so the card has served its purpose.
So right before the card anniversary is the time to cancel the card and avoid the fee associated with it. Otherwise the fees would begin to add up and eat away at the value of these credit cards.
Note: Do not cancel a credit card until the balance is fully paid off as this may result in a larger decrease in your credit score.
How is Credit Calculated?
To better understand why closing credit cards doesn’t hurt our credit score we need to first understand how credit is calculated.
According to Credit.com and affirmed with numerous sources, credit is determined by a few different factors:
- “Payment history: The record that demonstrates whether or not you make timely payments on your account. It accounts for 35% of your credit score.
- Credit utilization: The percentage of your available credit you have used. A lower ratio is better. This accounts for 30% of your credit score.
- Age of credit: How long you’ve had credit and how old your accounts are. It accounts for 15% of your credit score.
- Types of accounts: The diversity of your credit mix. This accounts for 10% of your credit score.
- Application history: How many times you have applied for various forms of credit in the past two years. This accounts for the last 10% of your credit score.”
What Won’t be Affected?
1) So right away we see that cancelling credit cards won’t affect our payment history as we will always be responsible with credit cards. If you aren’t able to pay your cards off in time and in full due to a lack of funds or responsibility, credit card hacking isn’t for you. (35%)
2) It won’t affect credit card utilization as we won’t be spending any more on our credit cards than we normally would. Remember, to reach bonuses we never overspend past our normal spending habits and always pay off our credit card debt before opening a new card.
So dropping our line of credit from $30,000 to $25,000 by cancelling a card with $5,000 credit limit won’t change our credit utilization. $0 of debt on $30,000 line of credit is no different than $0 in debt on $25,000 line of credit in terms of credit card utilization.
Plus, the available credit will quickly be returned to it’s baseline as you will still be utilizing a new credit card after cancelling the previous one if you are continuing to credit card hack. (30%)
3) It won’t affect your types of accounts either, as like I said, even after cancelling your credit card, you will still have other credit cards open plus any loans, mortgages, etc that you already have had on your score. (10%)
Simple math tells us that this accounts for 75% of our credit score. So right away 75% of our credit score is safe and won’t be affected by canceling a credit card.
What Will Be Affected?
Technically, cancelling a credit card will not affect our application history. However, I placed it here because with credit card hacking, we will be opening up credit cards a few times per year which can affect this category.
However, this only accounts for a small percentage of our credit score and if this is your only credit inquiries on a normal annual basis, this too will not change your score much.
Plus, this is easily avoided for couples as you can rotate opening cards between each other, thus making the credit application minimal. (10%)
*I plan to discuss this more in a separate post on the effects of opening credit cards on credit score
What Will Actually Be Affected
Where canceling credit cards actually have an effect is in on our age of credit. Since we are usually cancelling our cards after 1 year, this will lower our average age of credit each time we cancel a card.
However, what we need to remember is that we will still have other lines of credit open that don’t have annual fees. These other credit cards, loans, or mortgages serve to help keep the age of your credit score older.
I don’t have any loans any more and don’t have a mortgage, so my only lines of credit are credit cards. I have two cards that I got when I first opened my bank accounts when I left home for college. Both are zero fee cards that I don’t use but now serve strictly to keep me age of credit older, so there is no point in cancelling them.
Example: Currently, I have 5 credit cards open at this time, below are their ages.
- Credit Card 1 Age: 10 Years (120 months)
- Credit Card 2: 8 Years (96 months)
- Credit Card 3: 2.25 years (27 months)
- Credit Card 4: 1.5 years (18 months)
- Credit Card 5: 9 months
- Average Age of Credit: 4.5 year (54 months)
Credit Card 5 is my Southwest Rapid Rewards Plus card that I used to gain my coveted Southwest Companion Pass. I used the card strictly for this purpose and the card doesn’t have much benefit after reaching this milestone, so I plan to cancel it right before it’s 1 year anniversary in January but let’s say I cancelled it today.
Cancelling Credit Card 5 actually increases my average age of credit. As now my average age of credit is 5.4 years. (261 Months/4 cards)
However, if I were to cancel my oldest card, Credit Card 1, my age of credit would drop to 3.1 years. (150 months/4 cards)
So you can see how important it is to have some of these $0 fee credit cards to help act as a buffer if you plan to be cancelling credit cards regularly. The best part is that these buffer cards continue to age so over time cancelling and opening credit cards has less and less of an effect on your credit score.
Summary
In the end, even if your average age of credit does lower from cancelling a credit card, this only accounts for 15% of your total credit score. Cancelling 1, 2, or even 3 cards won’t drop your age of credit to zero months either, so likely the effects on your credit score will be minimum.
Usually mine drops 5-10 points and quickly returns to the same if not higher levels as I continue to show healthy credit card and debt use.
Real Example
This past year I had two credit cards that were approaching their anniversary that had served their purpose: the Chase Sapphire Preferred and the Citi AAdvantage Platinum Select Credit Card (review coming). I cancelled them 4/16/20 and 7/1/20 respectively.
Below is what actually happened to my credit score during this time and shortly there after. I use Credit Karma.
So you can see that my credit score barely changed after I cancelled the first card, dropped 16 points after I cancelled the second one, quickly rebounded two weeks later, and has maintained and even improved since then.
Conclusion
Cancelling credit cards does affect our credit score, but it affects it for such a short amount of time and in such a minuscule way that it’s safe to call this myth busted.
As long as we have healthy debt and credit card habits, credit card hacking is not going to affect our credit score in any meaningful way. Credit card hacking isn’t for everyone, but don’t let credit score be the fear that holds you back from thousands of dollars of free travel every year!
Let me know what you think!
If you have any questions feel free to comment below or email me directly at fiscaltherapist1@gmail.com
