While you’ve been loyal to your credit card provider, a friend recently informs you about an amazing new rewards program a different bank has on offer. Your interest spikes, but you have legitimate concerns. Will switching issuers have an effect on your credit score?
While your credit score doesn’t change by what bank you have a credit card with, applying with a new provider means you’ll be subect to a credit check. This may ding your score a little, but if you continue to pay your bills on time, you’ll recover from it quickly.
Ultimately, it’s what you do with your old card that matters the most.
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Should you close your old credit card?
Keeping old credit cards open (as long as you’re paying their statements each month) is great for your credit history and credit utilization ratio, both of which play a big part in deciding your credit score. That’s why experts recommend your first credit card be one without annual fees so you can keep a long, ongoing credit history.
What is credit history (and why is it important?)
Your credit history tells potential lenders how many years you’ve had open credit cards, how long your oldest card has been active, and the average age of all your credit cards combined.
Opening credit cards and paying your bills on time are great ways to build credit history. Doing this over a long period of time means that, when you’re ready to make a large purchase such as a home or a car, you’ll look like a trustworthy, low-risk client.
Closing a card can still appear on your credit history for up to 10 years, but once it’s finally scrubbed, it’s gone forever.
While you may still have a substantial history with other cards, if you keep your oldest card open, your history (and, consequently, your score) will be much more impressive.
Credit utilization and your credit score
Your credit utilization ratio refers to the amount of available credit you have vs. the amount you regularly use. Ideally, you want your rate of utilization to be around 30%. This means that if you have $10,000 of credit, you don’t want your monthly usage to exceed or fall below $3,000.
If you have more than one credit card, your total available credit is the combined limit of all, so closing down one account (especially if it carries a high credit limit) can diminish that number and cause your rate of utilization to spike, making it seem as though you’re spending beyond your means to potential lenders.
So, now that you know what could hurt your credit score, how do you protect it?
How to protect your credit score
The biggest way to minimize the impact on your credit score when switching to a new provider is to make sure any old cards you have are still open and active, meaning they’re still being used to pay even one small bill per month.
And if your old card carries an annual fee, contact your bank and ask for a product switch (a card upgrade or downgrade within the same provider) to a no-fee card. This way, you’ll no longer be paying for a card you barely use, and you’ll still be reaping the benefits of a long credit history and unchanged credit utilization.
Staying on top of your credit is an important part of financial responsibility, and there are a few great online tools that help you do this for free (such as Transunion and Equifax). Keeping a close eye on your credit score means you’ll be immediately aware of any changes and can handle them early.
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Why is a good credit score important?
Your credit score helps paint a picture of you as a credit user. The higher your score, the more dependable you seem to lenders, and the more likely you are to receive loans and lines of credit. Having a good credit score and a long, healthy credit history will come in handy if you want to start a small business or make large purchases like an automobile or home.
The bottom line
Providing you use credit responsibly, switching credit card issuers shouldn’t have any serious effect on your credit score. Remember to keep your old cards open and active if at all possible, and if you’re still looking for a change, use our credit card comparison tool to find the perfect card for you.