I’m in my friend Bari Tessler’s Art of Money year-long money school both as a participant and as a guest speaker and I was asked about closing a credit card.
Side note: Bari’s new book, Art of Money, is one of the books I recommend for dealing with the emotions of money. It’s especially good for dealing with ancestral money issues, and damn if I don’t still feel those about losing the family land. This isn’t an affiliate promotion for her program. I just genuinely love her work and have started dipping my toes in healing waters thanks to her.
I digress, as usual. Someone asked about breaking up with Wells Fargo and closing their credit card.
I’m sure you’ve heard you just flat out shouldn’t close your cards, but that can feel like you’re being held hostage by a bank whose morals you don’t like or who charges a fee for something you don’t use.
There are ways to mitigate the potential damage. You aren’t stuck anywhere.
Some caveats. Make sure your score is over 700 before you close anything. If you’re one of our credit repair clients (or you want to be one), let’s chat about closing cards first.
Also, if you’re applying for a mortgage or new car loan anytime soon, you might want to wait. More on that below.
As usual, it’s a long answer. But it’s long because I want you to know the full impact of it, so you can make the best decisions for yourself.
30% of your score is made up of your credit utilization and this is where you get the hit the hardest if you close an account if you don’t mitigate it (more on that in second). Another way to say it is how much of your available credit are you using. Ideally, you want the balance reporting to be 10-30% of your total credit across all lines. For the best score, you want to show some usage but not excessive.
Credit scores are a reflection of how well you use other people’s money, not how well you use cash.
Let’s make some general assumptions to illustrate the point. Let’s say you’ve got 10k total credit, and you charge and pay off 2-3k a month. You never pay any interest but you just get the points. You’re using 20-30%.
The balance that reports to the credit bureaus is the statement balance and that usually generates 3-4 days after the payment due date. Another way to say it would be your pay in full amount for the next month.
You could run the card up every month to maximize points, but the only day that counts is the one day a month when the statement generates.
Let’s say the Wells Fargo card is 5k. When you close it, you now only have 5k available credit, and you still charge 2-3 a month. The credit bureaus don’t show you pay your balance every month, except a nerd like me or an underwriter would be able to tell most of the time.
Your utilization went from 20-30% a month to 40-60% a month. Anything over 30% a month takes its toll. 50% really starts to hurt.
What you want to do is mitigate the potential losses before you close the account. Call/go online to your other credit cards you have a good relationship with and ask for a credit line increase if you haven’t done so in the last 6 months. It should be automatic if you’ve been in good standing with them. If a human asks why, just say you are doing some traveling.
90% of the time a credit line increase is not a hard pull on your score either. They just look at your history with them.
If your scores are over 700, you can apply for almost any new card you want, and that can take the place of the Wells card. If you’re under 700, Capital One is your best option. I had a client with a 647 with no open credit cards get a 10k limit with Capital One last week.
Credit utilization is something that can make a score rise and fall 40-120 points in one month, depending on the other items going on. It’s the one thing you’ve got the most control over. Max your cards out….free fall. Pay down below 30%, watch it rise.
Now, if you’ve got 30k in available credit across all cards and you close a 5k Wells card, it won’t hurt if you keep your balances low. The Wells card matters less and less, the more positive pay history and available credit you have.
You can also go to the credit union and ask them to match the Wells card and then close the old one.
If you’re applying for a mortgage or a car loan in the next 60 days, I would leave the Wells card open a few more months. Otherwise, just close it after you get the new cards. They won’t report a new card for 30-45 days, depending on when you happen to fall in the reporting cycle.
If no one is looking at your credit anyway, then who cares.
35% of your score is made up your payment history, and that card will stay on the report for 7 years, but it also will factor on there forever. Meaning, if you got your first card in 1999, even if you close it, it will still show you’ve had credit since 1999. It won’t ding you or make it look like you just got your first card in 2017.
15% is how long you’ve had credit, and it stays on there forever, even if it’s not on your report. They sort of meld together there.
Just keep making consistent payments and you’ll be fine. Also, generally credit scores are bracketed, so once you are in the bracket, you get the same rates for the whole bracket. If the good bracket is 700-749, as long as you’re at 700 you get the same rates as a 749.
Also, credit scores are the wild west. I wrote this article on the Daily Worth about it. It also includes where you can get your actual mortgage and auto scores.
There are some resources in there for pulling actually credit scores lenders use (no lender uses Credit Karma’s Vantage 3.0 score that I know of, although it’s good for finding out what cards you would qualify for) and if you want to pull just your actual FICO8 scores (a common score) then I recommend Credit Check Total. For my clients who are using Privacy Guard, which is compatible with my software, PG tends to be within 10 points of a FICO8.
AMEX also gives a free FICO8 score if you’ve got a card with them.
One last piece of advice: if you want to go leave Wells or any other bank, and you’re doing it because of their policies on the Dakota Access Pipeline or because they opened a bunch of fake accounts, let then know. Spread it on social media, if you’re comfortable, but write a letter to their Board of Trustees and corporate offices. This is how we get change.