I’ve gotten this question a number of times in different forms, and there seems to be a lot of confusion on this issue.
From one reader: How did you cancel all these cards without hurting your credit score?
Great question! Here’s my response:
Canceling credit cards won’t hurt your credit score per se. What it will do is change a few factors on your credit report that *do* affect your credit score.
For example, average age of open credit lines and your overall available credit and consequent credit utilization will change – and those are two factors that are directly taken into consideration when calculating your credit score.
When we’re talking about opening rewards cards like these for the signup bonus/other immediate bonuses, and canceling within a year to avoid the annual fee/to
churn and repeat the process, canceling the credit card in question is almost always *good* for your credit score – not bad.
Why? Let’s say you’ve had two credit cards open for 10 years each, with a total credit limit of $50,000. Say you have $25,000 in debt on your credit cards (which like, should never, ever happen, but for sake of the demonstration let’s assume a minor catastrophe occurred and you’re homeless on the street with an amputated leg or something). Your average age of open credit account would therefore be 10 years, total credit limit $50,000, and credit utilization 50% ($25k/50k).
Now let’s say you open one of these cards, with a credit limit of $25,000. Now your average age of open account instantly jumps down to 6.66 years (0+10+10/3), but your credit limit jumps up to $75,000, and your credit utilization down to just 33% ($25k/75k).
One thing here is good, and one thing is bad – average age of your credit lines is really important, so that going down will drop your credit score a bit. Credit utilization is also really important, so that going down to 33% instead of 50% is a really great thing.
There are some other minor factors that come into play here too, like credit inquiries (bad to have a lot, but doesn’t do much with just a few, and is wiped out in 2 years from your credit report and only temporarily drops your score a few points), and total # of credit accounts (including both open and closed accounts – the more the better, so by dint of opening a card alone, even if you close it immediately afterwards, you only serve to help this metric), but they’re not too significant and in the end tend to balance each other out.
In any case, in this hypothetical scenario, we can see that by opening the credit card, we definitely impact our credit score. For better or for worse – that depends on our individual metrics. If our credit utilization was really high before, and we open a card with a high credit limit, it’s likely to actually improve our score.
However, since we’re all hopefully financially responsible people here, chances are we don’t have any credit utilization, and so opening a card is likely to *slightly* hurt our score while it’s open, since it brings down the average age of our open credit accounts.
That said, closing the account would then therefore *benefit* our credit score, as it would increase our average age of open accounts back to what it was before.
So if you’ve followed this giant delineation, you’ll probably realize that all of this is moot: basically all the impact on your credit score that occurs by your opening the card is reversed by your closing the card. So chances are your credit score before and after the process will be basically exactly the same. The only difference is you’ll have traveled to some epic foreign country for free in the interim time or have thousands of extra dollars in your pocket.
(Note: the only two things that *do* stay on your record after this process, and aren’t entirely reversed, are credit inquiries and total # of credit accounts. Again, credit inquiries are slightly bad, but still totally temporary, and completely disappear in 2 years, and total # of credit accounts is *good*, and goes up every time you open a card, and even if you close it I believe it still stays on your record for at least 5 years, so essentially, in the long run, opening a ton of credit cards will actually *help* your credit score a bunch, not hurt it)
tl;dr: Your credit score couldn’t give any fewer fucks about you opening and closing credit cards. Go you!