Credit cards play a very important role in the miles and points hobby. Those reward points earning cards make this hobby all possible with traveling cheaper, smarter, and better. This hobby is not about spending on the card but about getting a new credit card that offers huge sign-up bonus points. 

Generally speaking, applying for a new credit card or closing a credit card impacts your credit score. In this post, I want to address some commonly asked questions and misconceptions about canceling and applying for a credit card and how each affects your overall credit. 

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    What are the 5 factors that affect your credit score?

    First, it's crucial to understand the five (5) biggest factors that affect your credit score. These factors will help you understand how your credit score is calculated to help you decide about opening or closing a credit card. 

    The following five (5) factors that make up your credit scores are provided by FICO:
    • Payment History (35%) 
      • This is the most important factor that makes you creditworthy to any lenders. 
    • Amounts Owed (30%) 
      • This is also referred to as Credit Utilization. It's calculated using the total balance on all your debts divided by your total available credit limit. Simply put, banks may assume you are a high-risk borrower if you spend more than you have. 
    • Length of Credit History (15%) 
      • This score is calculated based on the average age of all your credit accounts. The longer you've had credit, the better your credit score is. 
    • Credit Mix (10%)
      • Lenders also like seeing different types of credit lines in your credit profile, known as diversification. This includes but is not limited to credit cards, mortgages, car loans, student loans, and other finance company credit accounts. 
    • New Credit (10%)
      • If you try to open several credit accounts quickly, banks can interpret this to mean that you are in financial trouble and need to borrow more than you can pay back. This is especially true for those that do not have a long credit history, and banks can see that based on hard-pull credit inquiries and your recent opening credits in your credit report. 

    Therefore, there are so many factors that can impact your overall credit score and determine your creditworthiness. This shows that other factors affect your credit score more than just opening or closing a credit card

    Does opening a credit card hurt your credit?

    Yes, applying for a new credit card can hurt your credit score, but the impact is very low. You may see your credit score drop by a few points or less, but it's just temporary. Remember that new credit only makes up 10% of your overall credit score, and other factors, such as your payment history and overall credit utilization, are far more important.

    Opening a new credit card and getting approved for a credit line will also improve your credit utilization, which makes up 30% of your credit score. Here's why: 

    For example:
    • Suppose you have one credit card with a credit limit of $1,000
    • You put $1,000 spent on the card, utilizing 100% of your available credit limit. 
    • You are now approved for a new credit card with another $1,000 credit limit. So your overall available credit now is $2,000.
    • Your total credit balance remains at $1,000 per month. 
    • You are now utilizing only 50% of your available credit limit. This, in return, improves your credit score because your debt-to-credit ratio now is 50% lower

    Therefore, opening a new credit card can generally cause your credit score temporarily to go down a little. Still, your score will go back soon if you keep your credit utilization low and continue making outstanding on-time payments. 

    With that said, although it can be tempting to apply for a new credit card that has a lucrative sign-up bonus offer to play the miles and points game, you should be mindful of a few aspects too when it comes to your financial situation:
    • The miles and points hobby is unsuitable for you if you tend to make late credit card payments. 
    • The miles and points hobby is not for you if you like to spend more than you can afford.
    • You should wait to apply for a new credit account if you plan to purchase a home with a mortgage or re-finance your home soon.

    Does closing a credit card hurt your credit?

    The short answer is yes, closing or canceling a credit card can hurt your credit, but it largely depends on a couple factors below:

    Credit Utilization

    Your credit utilization which makes up 30% of your credit score, may be negatively impacted because your total available credit limit goes down. 

    For example:
    • Suppose you have two (2) credit cards, and each card has a $1,000 credit limit. 
    • If you spend $1,000 on the card each month, your utilization is 50% of your overall $2,000 credit limit. 
    • When you decide to close one of your two credit cards, your utilization is now double to 100% of your overall credit limit. This will hurt your credit as you max out available credit extended to you; thus, your debt-to-credit ratio is high. 

    Credit Age

    Your average credit age, which makes up 15% of your credit score, is also impacted when you close a credit card. However, there's more to it. 

    The gist is the longer you've had a credit card, the better it is for your credit score because your score is always based on the average age of all your credit accounts: 
    • Closing a credit card that remains open the longest will hurt your credit score. 
    • Closing a recent open credit card will have less of an impact. 

    Therefore, evaluate each credit card you have. If the card does not provide any benefits that outweigh the fees, such as the card's annual fee and interest rate, it may make sense to cancel that credit card. However, it is vital to remember that you want to avoid closing the oldest credit card account. You can keep the age of that credit account without closing it by asking to see if there's an option to product change or downgrade it to a no annual fee card. This way, you can keep all the credit history associated with that card, even if it's a new card with new card numbers, etc. More below. 

    Is it better to close a credit card or leave it open with a zero balance?

    You can minimize the impact of closing a credit card, especially your oldest credit card by keeping it open. It is better to leave your credit card open for a long time than close it because of the credit age mentioned above. 

    Remember this:
    • Closing a credit card that remains open the longest will hurt your credit score. 
    • Closing a recent open credit card will have less of an impact. 

    Here are a few things to consider:
    • If the credit card has an annual fee and you no longer get the value of out it, contact the bank and see if there are any retention offers if you were to close the card. This is just a strategy to check any offers available to keep your card open for another year, and it does not necessarily mean you want to close the card. 
    • If there are no retention offers or you do not like them, ask and see if you can downgrade the card to a no annual fee card or product change it to a different card. Doing so allows you to keep the card on your credit history and helps boost your credit score. 
    • If you decide to leave a credit card open or you have a new credit card after the downgrade, try to use the card once in a while, even with a $1 coffee, instead of leaving it in your sock drawer with a zero balance. This way, you will not be subjected to account closure involuntarily by the bank. When a bank closes your account, that also harms your credit score. 
    • If you must close a credit card, you can ask if you can transfer the credit line to another card you have to help keep your credit utilization low. Another option is to be quick and pay your credit card bill each time before the card's statement closes, which can also help to keep your credit utilization low. 

    Does checking your credit score hurt your credit?

    Another common question people tend to have is how checking their credit score may impact their credit. Checking your credit score is considered a soft pull, a credit terminology for a type of credit inquiry, and this soft pull does NOT hurt your credit at all. 
    • Soft pull/soft credit check/soft inquiry occurs when you check your own credit or when lenders check your credit on their own to determine if you qualify for a loan or a credit card offer for marketing purposes. Another scenario is when you go through a pre-qualifying or pre-approval process to see if you are qualified for a credit card. This type of credit inquiry does not affect your credit score. 
    • Hard pull/hard credit check/hard inquiry occurs when the lender checks your credit because you are applying for a new loan or a credit card. This type of credit inquiry affects your credit score. 

    Does applying for a pre-approved credit card affect your credit score?

    As mentioned above, when you go through a pre-approval process for a credit card, your credit score is not affected by that type of credit check because it is a soft pull done by the card issuer to determine if you qualify for a credit card. 

    However, when you apply for a pre-approved credit card, you are specifically submitting a credit application. Therefore, it is a hard pull done by the card issuer to approve or deny your application. This will make your credit score go down a little temporarily. The impact on your credit score is fairly low when you open a credit card or a pre-approved credit card. See the above section, Does opening a credit card hurt your credit?

    Does adding a credit card improve your credit score? 

    Yes, it can because your total available credit limit is increased; therefore, your credit utilization is improved with a low debt-to-credit ratio. See the illustrated example in the above section, Does opening a credit card hurt your credit?

    How to improve your credit score?

    We'll have to go back to the 5 factors that affect our credit scores: 
    • Payment History (35%) 
    • Amounts Owed (30%) 
    • Length of Credit History (15%) 
    • Credit Mix (10%)
    • New Credit (10%)

    You can focus on strategies to improve your credit score based on those mentioned above five (5) factors that make up your credit score. Here are some recommendations:
    • The most fundamental first step is to open a credit account. To build a credit history in your name, you must have a credit file.
    • Be responsible and over-proactive with on-time payments. Credit accounts allow auto-payment set up to withdraw payment from your checking account for the amount due. This is one of the best ways to avoid missing payments. 
    • Keep your credit utilization rate low. High credit utilization increases your debt-to-credit ratio and will hurt your credit score. One way is to pay your credit card bill each time before the card's statement closes or the balance due date, which can help keep your credit utilization low. Paying down account balances also helps. 
    • Avoid closing or canceling the oldest credit account you have. Closing those accounts will hurt your score the most. Instead, request the product change or downgrade the card to keep that account on your credit history and maintain credit age. 
    • Limit how often you apply for a new credit account. While the impact on your credit score is low, it can hurt your overall credit health if you open accounts too often, and this can cause issues getting a new loan or credit card approved too. 

    What is the best way to check your credit score for free? 

    First, you must understand that checking your credit score is considered a soft pull credit inquiry, which will not impact your score. 

    It is crucial to check your score from time to time for all three (3) credit bureaus, especially when you want to apply for a loan or a rewards credit card. There's no harm doing that. The best part is that it's free, and some reliable credit sources even alert you when a new hard pull credit inquiry occurs or when there's a change to your credit file. 
    • Credit Karma 
      • Free credit scores, weekly free credit reports, and free credit monitoring. 
      • Pulls from TransUnion and Equifax credit bureaus. 
    • Credit Sesame
      • Free credit scores and free credit monitoring. 
      • Credit reports are not free.
      • Pulls from TransUnion and Equifax credit bureaus. 
    • Experian
      • Free credit scores, free credit reports, and free credit monitoring. 
      • Pulls from Experian credit bureau only. 
    • Credit.com
      • Free credit scores, free credit report cards, and free credit monitoring. 
      • Pulls from Experian credit bureau only. 

    When you apply for a credit account, banks or lenders typically do not pull all three (3) credit bureaus. There's no crystal ball to tell you which credit bureau they could use, which can vary based on your location. You learn from each past credit application you request with a particular bank. Capital One is an exception because they pull credit reports from all three credit bureaus when you apply for a credit card with them.