When to close an annual-fee card

Cashing In columnist Tony Mecia
Tony Mecia is a business journalist who writes for a number of trade and general-interest publications. He writes "Cashing In," a weekly column about credit card rewards programs, for CreditCards.com

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Question Dear Cashing In,
I have a Capital One credit card that I've had since 2009 (no late payments) with a $1,500 credit line, zero balance, 19.99 percent APR and a $59 annual fee. I recently received a preapproval offer from Capital One for another card with $5,000 credit line, 0 percent APR until November 2016, no annual fee and 1.5 percent cash rewards.

My thought was to get the new card with the $5,000 credit line and close out the old one, mostly because they're not willing to work with me on removing the annual fee. I have heard that this may negatively affect my credit score. Will it? -- Otto

Answer Dear Otto,
If your credit card saga were a relationship, it would go something like this: You've been dating someone for a long time. You treated her well. You've had a good run together. But she's starting to take you for granted. Now, someone new is in the picture, and she's making a compelling case. What do you do?

"Cashing In" is no "Dear Abby," but wouldn't you examine both options closely? You wouldn't want to stick with one just out of habit. Stay only if you have a compelling reason.

When it comes to credit cards, it is always a good idea to look around, especially if you have had the same credit card for six years. New cards emerge all the time with attractive deals and better bonuses designed to lure you away from the card you have always had. Card companies know that most people are creatures of habit and require some incentive to switch cards. Examine those incentives.

In your case, Otto, it is true that applying for a new card will likely cause a small and temporary reduction in your credit score. Each application for a card dings your score a few points.  But assuming you continue to make on-time payments, the new card will be a net positive. You'd eliminate the $59 annual fee, get 1.5 percent cash back, and that bigger credit line will give you the flexibility to carry a small balance without hurting your score.

Don't worry about the old myth that closing an account will hurt your score by reducing the average length of your credit history. It's not true: The credit history associated with the account will stay on your credit report for another 10 years after it's closed. By the time it drops off your report, you'll have a fresh 10 years of data to buoy your score.

Also, remember that the APR on these cards does not matter unless you are carrying a balance. If you pay your balance off in full every month, you will pay zero in interest charges, regardless of your card's stated APR.

If you are carrying a balance on the old card, you might not be able to transfer the balance to the new card because they are from the same bank. Even if you could, you should watch out for balance transfer fees, and any amount you transfer would not be eligible for rewards.

If you are continually carrying balances, try to make sure you have everything paid off before the 0 percent interest offer expires.

So, Otto, take a hard look at the new card offer, and if you need to sever your old credit card relationship and close the account, so be it. 

See related: How to cancel a credit card, Getting started with rewards cards, When canceling a rewards card, purge clutter, but not points

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Updated: 10-23-2018