Some consequences of opening & closing cards to consider

This post originally appeared June 1, 2017 on as “‘How will closing secured card, opening unsecured card affect credit?”

By Barry Paperno

Dear Speaking of Credit,
I have a CD at USAA for $500, which secures my USAA American Express card for a $500 limit.

My FICO score is now where I can qualify for an unsecured card, but USAA will not convert my AmEx to an unsecured card. They insist I have to close the AmEx and open a new unsecured AmEx.

Will that affect my credit score? Will I lose all of the good credit history? – Jerry

Dear Jerry,
Great job of using that secured card to help rebuild your credit! Now that your score qualifies you for an unsecured card, it’s smart to be concerned about any possible credit scoring effects from closing the secured card and opening a new unsecured one.

To check the credit scoring impact of switching cards, we reached out to USAA with your question. “A (USAA) member does not have to close a current account to apply for a new card type,” said USAA spokeswoman Gloria Manzano. “Instead of switching cards, we ask existing cardholders to appy for the new card, with a hard credit pull, in order to get an updated evaluation of the member’s credit standing.”

Manzano added that USAA is “working on a solution to make the transition to a different card type simpler by switching the current account to the new card type and using a soft credit pull.” USAA expects to make such solution available to customers by the end of the year.

So, I’d suggest you contact your local USAA branch first. You might not have to close your secured card in order to apply for a new card after all.

In the meantime, as we explore some of the possible outcomes from opening and closing cards, know upfront that secured and unsecured cards are treated equally by the credit scoring formulas and that none of the resulting impacts are likely to change your score – either positively or negatively – in a big way.

Possible consequences of closing secured card
Before taking a look at just what will and won’t affect your credit score, let’s address your second question first.

I can assure you that, no, you won’t lose any of the credit history associated with your secured American Express card after closing it. At least, and as you’ll see later, not right away.

Now, let’s examine a couple of the possible negative scoring consequences you may encounter when closing that secured card:

  • Once closed with a $0 balance, a card is no longer included in the credit utilization calculations that use balances and credit limits to measure how much of your available credit you’re using.
  • Depending on the size of the closed card’s credit limit and how much of your other cards’ available credit has been utilized, the resulting utilization will either be higher (worse for your score) or remain the same – which then may or may not affect your score.
  • A closed account with a spotty payment history is removed from a credit report seven years after the first reported delinquency. However, an account showing a spotless record of on-time payments – such as yours, we’ll assume – can remain on a credit report and contribute to a credit score typically for 10 years.

Possible downsides of opening new unsecured card
In addition to these downsides from closing a card, there are a couple more that can accompany the new unsecured card opening:

  • When first appearing on a credit report, a new card’s “open date” can lower the average account age and shorten the length of time since the most recent account opening. These two scoring factors – new credit and account age – help measure the length of credit history.
  • The credit check leading to the new account opening is likely to leave a hard inquiry on your credit report from one of the credit bureaus. This typically costs the score about five points.

Upsides of opening a new card
Now, here is some good news. A new card opening can help overcome some of the harm brought on by closing a card:

  • As long as the new card’s credit limit is at least as high as the closed-out one, when first appearing on your credit report it should instantly compensate for the loss of the closed card’s $0 balance and credit limit in utilization calculations.
  • Looking far ahead, when that closed card falls off your credit report in 10 years, your score shouldn’t shrink due to its loss, as long as this and future new cards remain open indefinitely.As noted at the outset, the net effect on your credit score from closing and opening these cards should be minimal.Any negative impacts, such as from higher utilization due to a low credit limit on the new card, are likely to be short-lived and lessened with the passage of time.

    On the positive side, a substantially higher limit on the new card could effectively lower your combined card utilization and raise your credit score.

    • Going forward, along with the usual advice to always pay on time, try to avoid closing any more cards.
    • Keep your card debt level low – single-digit utilization percentages are ideal.
    • Finally, open additional new credit accounts sparingly.

    Good luck and keep building that credit!

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