If you don’t know the feeling, opening up a credit card is an exciting time. As exciting an event as it sounds, it’s another step toward becoming more responsible. Really, another bill to keep track of at the end of the day.
Credit card companies entice us with big bonus offers like 50,000 points toward travel, Double Cash Back on Every Purchase, or 3% Cash Back for Every Trip to the Pump! And it works. If you’re going to pay cash or debit for something, you’re better served paying with credit cards and paying off your statement balance each month without accruing interest. Rewards programs are the way to go for the responsible spender.
However, there’s a catch. Of course there is, why wouldn’t there be? Lots of cards will tell you Zero Introductory Fee for the first 12 months. So you’re thinking “sweet, don’t have to worry about paying for this card for a year!” And then… the year comes and now the annual fee is $100 or more for this card you were reaping the benefits of for no cost at all. Bummer! What do you do now?
Make a Decision on Keeping the Card
You’re probably not excited to start paying for this piece of plastic that you’ve been treating as your free license to buy burritos and drinks the past year. Compare it to the feeling of when that honeymoon period has passed in your relationship and the excitement starts to fizzle away. Do you even want to keep this card? You’ve met the minimum purchase requirements (ex. Spend $3,000 in 3 months for 40,000 rewards points). After you’ve achieved this, the card’s draw whittles down to bonus day-to-day benefits like Double Miles on Every Purchase or 3% Cash Back at Restaurants.
While these benefits are still better than paying on your debit card, you’ve already eaten the carrot on a stick that they hung in front of you when you initially activated the card. Understandably, you can’t help but feel a little bitter once your free ride is over.
Now, you have one of two options. Swallow the cost or cancel the card. There are drawbacks to doing both, but it depends on your situation. Cancelling a credit card will more than likely negatively impact your credit score. How much depends on a number of different factors including your length of credit history, how many lines of credit you have open, and how much you owe.
On the other hand, if you are a rewards seeker (guilty!), then taking the hit on your credit score to not pay an annual fee could be worth it to you. If you’re seeking to open a new credit card to take advantage of a different rewards program such as getting loads of travel points towards hotels and flights, this is a commonly used tactic by travel hackers. The initial hit likely won’t sting your credit score enough compared to the thrill of getting free flights.
At the end of the day, the biggest factors affecting your credit are if you make payments on time and pay off your statement balances each month. If you’re responsible, credit bureaus will continue to reward you with a high school. Like Drakes says, “real recognize real”.
Be Strategic About Opening a Credit Card
While getting free travel miles, hotels, or gas is appealing, it’s important to be strategic about opening credit cards. While you do hear about people who have 40 credit cards open at a time, they are nerds about this stuff and put in more research than you or me when doing this. They find loopholes and geek out on taking advantage of every hack. If you want to invest the time to do all that and keep track of all your cards and balances, you’d be doing the most.
Credit cards have large spending requirements for rewards programs. Depending on the amount of the initial bonus rewards, you’ll typically have to put $1,000 or more on a single credit card during the first 3 months of activation. This likely won’t include your rent or mortgage so if you have a big trip coming up where you plan on making it rain (thanks Fat Joe) or are able to expense costs for work, this would be a time to look into good credit cards. However, if spending this much money is a stretch for you, then don’t open a credit card just to spend. The initial rewards wouldn’t be worth the extra costs you’re taking on.
Weigh All Your Options
If you’re thinking about closing a credit card to ditch that annual fee, think from the perspective of the credit card company. Would they rather you leave their business or negotiate waiving your fee for another 6 months? Chances are they like you spending money with them and will try to retain you as a customer. Don’t be afraid to call your card company and test these waters.
Also, cancelling your credit card will lower your credit utilization ratio, decreasing your amount of available credit. If you’re using anywhere near 30% or more of your available credit, then your score will be negatively affected. Opening up a new credit card after closing one will help to increase your credit utilization ratio.
Lastly, it’s very important to keep your oldest credit card open. Your credit and FICO score are determined largely by your average age of accounts. For example, If you have 3 credit cards ranging from 8 years, 2 years, and 6 months, closing your oldest one will significantly bring that average down and hurt your score.
Speaking from experience, I lost my oldest credit card, cancelled it, and failed to request a new one because I never used it. In turn, the bank closed the account without me knowing and my credit score took a hit of 20 points! Lesson learned.