One of our readers, Edward, had this question:

I currently have a bank VISA card with a zero balance and would like to cancel that card and switch to an airlines card. There is an annual fee on the potential new card but the benefits outweigh the fee. I have been told that when the old card is canceled, it could result in a lowered credit rating. Right now, our credit rating is excellent and I do not wish to jeopardize that rating.
Please advise

Thanks for your question Edward. You should definitely apply for the new card before you cancel the old one. Basically the length of time that you have had your credit cards amounts to 10% of your FICO score. Closing a card factors into that. So, yes, your credit score will take a hit when you close your old card.

If you are contentious about your credit, you pay your bills on time, and manage your credit well, it will not be a big hit – probably just a few points. However, the reason I recommend going ahead and opening up the new account before closing the old is simple: The credit industry is in a bit of a lending crunch right now.

It makes the most sense to have your credit score as high as possible before applying, that way you have the best chance of being approved for the new card that you want.

After you get the new card, you can choose to leave the old account open (especially since it has a zero balance) or you can choose to close it out and be done with it.

One last caveat: If you plan to carry a balance on your new credit card, then it would be best to leave the old card open with a zero balance.

I say this because how much of your overall credit limit you use has a large impact on your credit score: 30%. If you leave the old card open with a zero balance, this will keep your debt-to-credit ratio low, and it will actually raise your credit score.

If you do not plan to carry a balance, then there is no real harm in closing out the old account once you are done with it. The small drop in your credit score will most likely fix itself as you continue your good credit habits.

For more information on how your credit score works, and why certain things affect it, you can check out our article: The FICO Score Breakdown.

Hope this helps! Thank you very much for your question.

This entry was posted on Tuesday, December 30th, 2008 at 09:45 and is filed under Reader's FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.