When pursuing points and miles using credit card sign-up bonuses, you soon accumulate a lot of credit cards. I was accustomed to carrying multiple cards before I became immersed in these rewards, but the number of cards I currently hold has tripled. As an early-year task, I decided to undertake a top-to-bottom review of my open accounts in order to decide if any should be closed. There are more than a few credit card products on the market that I would like to obtain, so I want to strategize how to adjust my card portfolio in 2018. In a series of posts, I will review the cards I hold from various issuers and decide if it's time to close any. Part of my review will assess how an existing card combines with any new cards I am considering. Because potential cards can impact a keep-or-cancel decision, I will mention relevant products that are on my radar, but I will postpone a full analysis until I am ready to adjust my collection. Today, I want to provide a little background to frame my analyses.
Evaluating my credit card portfolio
Keep, cancel or convert?
The biggest question when deciding if you should close a credit card account is whether you are receiving sufficient value to justify the annual fee. If you can’t quantify value greater than or equal to the fee, you should seriously considering cancelling the card. However, some cards offer non-monetary benefits on which it can be difficult to attach a dollar value. For these, you should ask yourself if the difference between the monetary value of the card and the annual fee is a price you would pay for those benefits? If not, a decision to close is stronger. There are other considerations aside from monetary value in play, however.
Contrary to what you might think, sign-up bonuses you previously earned may also be relevant. Many banks allow you to again earn a sign-up bonus on the same card product after a period in which you do not hold the card or have not received a sign-up bonus. By closing such an account, you may be able to start the countdown to a renewal of eligibility. Other banks have restrictions on the number of open accounts you can have - American Express comes to mind - or on carrying two cards in the same product line - the Chase Sapphire family of cards, for example. If you are maxed out or if one card you carry is preventing you from applying for a different product, you need to close an account. Alternatively, you may be able to convert a card to another product. There is a final and significant consideration in canceling a credit card: the potential impact on your credit score.
Impacts to your credit score
There are two impacts to your credit score to keep in mind as you decide whether to close an account. First, a credit card account’s longevity has a favorable impact on your credit rating. You should be aware of how long an account has been open as you ponder whether to cancel the card. The second issue is credit-card utilization:
Credit card utilization — or just credit utilization, for short — refers to how much of your available credit you use at any given time.
Assuming your monthly credit usage remains the same even if you close an account, when your total available credit decreases if you close an account, the percentage of your total remaining credit that is used increases. This higher utilization rate negatively impacts your credit score. Of course, if you have a large amount of credit capacity, closure of one card might not change the utilization rate dramatically, but this potential drag on your rating is a factor to keep in mind.
In both cases, conversion may be a good option. If you convert a long-lived card to a different product, your credit score will continue to benefit while you avoid an annual fee that you can’t justify. Also, maintaining your total overall credit line keeps your utilization rate constant. My first-ever credit card from Citibank was opened when I was in college in the 90s. Over the years, it has been many different products and is now the no-annual fee Citi ThankYou Preferred card. Though I never use the card, my credit report still shows a 25-year-old account in good standing and it's credit limit adds to my total available credit. No matter what moves I make with my current stable of Citibank cards, I will not be closing this account! Be aware that you generally won’t receive a new cardmember bonus if you convert to another product and, depending on bank rules, you could jeopardize any future bonuses so carefully review the terms and conditions.
As you collect more and more credit cards in pursuit of points and miles, you almost certainly have some accounts that are candidates for closure. A top-to-bottom review of your card portfolio from time-to-time is a good practice. This month I intend to undertake such a review and outline for you my thought process in doing so. I will not only be reviewing my cards solely on their own merits, but also in light of how they coexist with other card products I currently have or would like to obtain.
Have your reviewed your card portfolio lately? What criteria did you use to decide whether to keep, close, or convert an account? Let us know in the comments!