Dear Credit Guy,
Please advise me on the following situation: I have impeccable credit and desire to maintain it. I have business credit card and have been using it for many years. However, I recently applied for and was approved for a Costco rewards card that promises to deliver great stuff ($$) every February. How do I safely and gracefully exit the first card (which carries an annual $40 fee) in order to transact business on the second card? (The first card expires in two years.) Thank you. -- Jeanette
Dear Jeanette,
Congratulations on building and maintaining an excellent credit history. It takes hard work and dedication to achieve an impeccable credit score. The average American's score is about 693, according to credit bureau Experian's National Score Index. It sounds as if you have learned how to manage your credit card use to the maximum benefit and that is one of the keys to the successful use of credit.
Trading up to a retail rewards card is a natural progression in credit card use; it's also wise on your part to apply for a credit product that makes sense for the ways in which you will be using it. Since you are a Costco customer, it makes financial sense to use a card that will reward you for the habits you already have.
To illustrate my point, let's say you received a solicitation for a rewards credit card that would require you to shop at a competing store that was nowhere near your location and very inconvenient. This type of card would not necessarily be the best fit for you because you would have to change your current behavior in order to benefit from the rewards.
For anyone shopping for a rewards credit card, use a little common sense and keep the following statements in mind:
Make sure the rewards will outweigh any annual fee.
If you don't plan to pay the card's balance in full each month, check to be sure you are receiving a competitive interest rate.
Only apply for the rewards card(s) that will provide you a benefit from your current spending behavior.
Read the card agreement carefully so you know exactly what terms you are agreeing to. In particular, try to stay away from cards with a universal default clause.
Making the transition from your current card to your new rewards card should be fairly simple. If you are carrying a balance on your current card, do not add any new purchases and plan to pay off the balance as quickly as possible. Any new purchases should be placed on the new rewards card.
If you plan to carry a balance on your rewards card, make sure you have a plan in place to pay off purchases within 90 days. In other words, do not carry a balance that is larger than what you could pay off in three payments. For example, if you can afford to pay $300 per month toward the card, you should carry a balance no larger than $900.
Once you begin using your new rewards card, you will have a decision to make as to whether to close your current card account. The card has an annual fee of $40 so on the surface it seems like a no-brainer to close the account. However, if you have had the account for years and it is the oldest credit account on your credit history, your credit score will likely take a dip if the card is canceled. I recommend you weigh the disadvantages of a somewhat lower credit score with the cost of a $40 annual fee. If you aren't planning to access any new credit for the next couple of years, and with your impeccable credit score of more than 725, it might make the most sense to go ahead and cancel the card.
Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.
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