Don’t Make This Mistake With Credit Cards

Suppose you are considering utilizing credit cards for award travel or just everyday use, don’t make this mistake with credit cards.  That mistake is closing a credit card because you didn’t have a game plan to start out and just select a card at random.   If you close a credit card at the wrong time, it may drastically impact your credit utilization metric which makes up 30% of your credit score in a negative way.

Credit Utilization

You may have various reason for wanting to close a card.  One notably being to avoid an annual fee.  Out the gate, if this is the case, you may have made a mistake.  However, if you have laid good foundation off which to build credit history, sometimes it’s OK to close a card without fretting.  Otherwise, you may be shooting yourself in the foot .  Depending on how many credit cards you have and the credit available on them, you either reduce credit utilization (debt owed ÷ credit available) metric to none or make the denominator of the calculation smaller.  Thus, you increase the weighting of the other credit factors like payment history, credit age, hard inquires, derogatory marks, and total accounts for lack of credit utilization.  Also, you skew your credit utilization higher due to less credit available to debt owed.

Example

• No debt or credit available is no credit utilization and not 0% credit utilization
• $5,000 debt/$5,000 credit available is 100% credit utilization (this is a negative the greater the number is to 100%)
• $5,000 debt/$10,000 credit available is 50% credit utilization (this is more positive then aforementioned the greater the number is from 100%)

Note:  You want the denominator number (credit available) to be bigger than the numerator number (debt owed); thus, moving the credit utilization into the lower digit percentages.

Credit Card Selection

Let this knowledge guide you during the selection of credit card(s) you get.  So, you aren’t pressured to close at an inopportune time for the sake of saving an annual fee.  For that reason it is best to look for cards that have no annual fees or card products that you can downgrade from fee card to a no annual fee card.  That way you don’t need to close the card and the credit available is still open to you, even if you have no intentions of using it further.

For above stated reason, use caution in opening airline and hotel credit cards as your first cards if they have annual fee but no fee-free card product you can downgrade too.  You should look at credit products from Barclaycard, Chase, Citi, and American Express cards that have fee card products that can be downgraded to no annual fee product.  This way your credit score is not impacted and these cards can often stay and become the long term history for your credit as they age and become your oldest held credit cards.

Options To Downgrade

Chase

• From Sapphire (Preferred or Reserve) ->> Freedom Unlimited or Freedom
• From Ink Business Preferred ->> Ink Business Cash

Citi

• From Prestige ->> Thank You Preferred
• From Prestige ->> Double Cash
• From Thank You Premier ->> Thank You Preferred
• Expedia Voyager ->> Expedia

American Express

• From Amex Everyday Preferred ->> Amex Everyday
• From Amex Everyday Preferred ->> Blue Cash Everyday or Blue
• From Blue Cash Preferred ->> Blue Cash Everyday or Blue
• From Delta SkyMiles (Platinum, Gold, or Reserve) ->> Blue Delta SkyMiles
• From Hilton Honors Surpass ->> Hilton Honors

Barclaycard

• From Arrival Plus ->> Arrival

Options For No Annual Fee To Start

Chase

• Freedom Unlimited or Freedom
• Ink Business Cash
• Amazon Rewards Signature Visa
• Slate

Citi

• Double Cash
• Simplicity
• Thank You Preferred
• AT&T Access
• Expedia Card

American Express

• Amex Everyday
• Blue Cash Everyday
• Blue Delta SkyMiles
• Blue
• Blue Business Plus

Barclaycard

• Arrival
• CashForward
• Priceline Rewards
• Barclay Visa with Apple Rewards

If you have the ability to initially signup for a card that has annual fee but you get a signup bonus, try that first.  If necessary, you can downgrade to the above listed at anytime.  I would hate for you to miss an opportunity for big bonuses that can be used towards award travel.  Let cards like those listed here be those used to set a sound foundation for your credit history.  Then add/subtract other credit cards from this mix as needed.

In Closing

So, if you are just starting with credit or are continuing, don’t make this mistake with credit cards you have opened by closing them because you didn’t have a good initial strategy for credit card use.  Use the knowledge here pertaining to credit utilization and card selection to ensure you maximize award travel opportunities and minimize avoidable negative impacts to your credit score.