Does Changing Credit Cards Affect Credit Score?
Discover how various credit card actions, from opening new accounts to closing old ones, shape your credit score. Learn to manage your credit effectively.
Discover how various credit card actions, from opening new accounts to closing old ones, shape your credit score. Learn to manage your credit effectively.
Credit scores are a fundamental aspect of personal finance, influencing access to various financial products and services. Understanding how actions, particularly those involving credit cards, can impact this score is essential for maintaining financial health. Changing credit cards, whether by opening new ones or closing existing accounts, can have both immediate and long-term consequences for your credit standing.
A credit score, such as a FICO score, is a numerical representation of an individual’s creditworthiness, typically ranging from 300 to 850. Lenders use this score to assess the risk involved in extending credit. Several key factors contribute to its calculation, each carrying a different weight.
Payment history is the most significant factor, accounting for approximately 35% of a FICO score, indicating whether past credit accounts have been paid on time. Amounts owed, or credit utilization, makes up about 30% of the score and reflects the proportion of available credit currently being used. A lower utilization rate is viewed more favorably.
The length of credit history, which includes the age of the oldest account and the average age of all accounts, accounts for roughly 15%. New credit, representing recent credit applications and newly opened accounts, contributes around 10%. Finally, credit mix, or the diversity of credit accounts like credit cards and installment loans, accounts for the remaining 10%.
Applying for and opening a new credit card can lead to both temporary and longer-term effects on a credit score. When an application is submitted, a “hard inquiry” is generated on your credit report as the lender reviews your creditworthiness. This hard inquiry can cause a slight, temporary dip in your credit score and remains on your credit report for up to two years.
Opening a new account also affects the average age of your credit history. Since a new card is a very young account, it can lower the average age of all your accounts, particularly if you have a short credit history or only a few existing accounts. This reduction in average age can negatively influence the 15% portion of your score related to credit history length.
However, a new credit card can also positively impact credit utilization by increasing your total available credit. If your spending remains consistent, the added credit limit can lower your overall credit utilization ratio, which is beneficial for your score.
Closing an existing credit card can have several negative implications for a credit score, especially if it’s an older account. One significant effect is on credit utilization. When an account is closed, its credit limit is removed from your total available credit.
If you carry balances on other cards, this reduction in available credit can increase your overall credit utilization ratio, potentially leading to a decrease in your score. For instance, closing a card with a $2,000 limit when you have $5,000 total credit and $1,000 debt would raise your utilization from 20% to 33%.
Another factor affected is the length of your credit history. Closing an older account shortens the average age of your accounts, which can negatively impact the 15% of your score tied to credit history length. Accounts closed in good standing remain on your credit report for up to 10 years. However, closing a very old account can still eventually reduce your average account age.
Beyond simply opening or closing cards, other credit card actions can influence your score.
A product change or upgrade, where you switch to a different card offered by the same issuer without a new application, does not result in a hard inquiry or the creation of a new account. This means your existing account history, including its age and credit limit, is preserved, leading to minimal direct impact on your credit score.
Balance transfers, which involve moving debt from one card to another, can affect your score depending on how they are managed. If a balance transfer requires applying for a new credit card, it will incur a hard inquiry and potentially lower the average age of your accounts. A balance transfer can also positively impact your credit utilization if it consolidates debt onto a card with a lower interest rate, allowing you to pay down balances faster. Transferring balances between existing cards, without opening a new account, has no direct impact on your score as available credit and utilization remain unchanged.
Requesting a credit limit increase on an existing card can also have varied effects. If the issuer performs a “hard inquiry” to evaluate your request, your score may temporarily dip by a few points. However, if the increase is granted, it can improve your credit utilization ratio by increasing your total available credit, which is beneficial if your spending habits do not change. Some issuers may offer automatic credit limit increases without a hard inquiry, which does not affect your score.