If your current credit card isn’t meeting your needs, you might consider switching to a new one. But does switching credit cards affect your credit scores in any way?
Let’s take a deep dive into swapping credit cards and how it might impact your credit.
Key Points:
- Switching credit cards may or may not impact your credit scores, depending on the situation.
- If you stick with your current creditor, keep your credit limit the same, and switch to a card similar to what you have now, your score may not be affected.
- If you switch creditors, opt for a premium card, or request a credit limit increase when you make the switch, your credit scores could be impacted due to a credit check.
Does Switching Credit Cards Affect Your Credit Scores?
How your credit is affected when you switch credit cards depends on the situation.
Switching With The Same Creditor
If you’re swapping cards with the same bank that issued your current credit card, your credit scores may be safe. As an existing client, you may not have to be subject to a credit check. In this case, your credit scores may remain as is, as long as you maintain good spending habits.
However, if your new card is an upgrade that requires excellent credit scores or a credit limit increase, your creditor may require a credit check. If this happens, your score may decrease, though only temporarily.
Switching With A New Creditor
If you apply for a new credit card with a different creditor, you may be subject to a credit check. In this situation, your credit scores could take a small hit.
Reasons To Switch Your Credit Card
There are many reasons you may want to switch your credit card for a new one, including the following:
You Want A Lower Interest Rate
Credit cards are notorious for their sky-high interest rates. If you carry a balance from one month to the next, you’ll be paying interest on what you still owe. While the best way to avoid paying interest is to pay off your balance in full every month, you could also opt for a low-interest rate card.
Many credit cards offer lower rates, including those that offer introductory APRs. For example, some credit cards offer 0% APR for the first 6 months, allowing you to put a large expenditure on your credit card without paying any interest. As long as you pay off that balance before the introductory period ends, you can take advantage of interest-free credit while paying down your credit card debt.
Your Financial Situation Has Changed
If your income or credit scores have improved since you last applied for your credit card, you may be eligible for a premium credit card. These cards have additional perks, like travel insurance coverage plans and rewards points.
Conversely, if your finances have taken a hit recently and you’re struggling with payments, switching to a lower-interest-rate credit card may be a better option. Paying a lower rate on your outstanding balance means less money spent on interest.
You Want To Take Advantage Of A Better Rewards Program
One of the perks of using a credit card to make purchases is that you can earn rewards points with every dollar you spend. But some rewards programs are better than others and offer a higher earning rate.
Further, some credit cards offer a higher earn rate for specific purchases. For instance, one credit card may offer 3 times the points for grocery purchases, while others may bump up the earn rate for expenditures at gas stations. If you spend a lot of money in one particular area, you’ll want a credit card that accommodates your spending habits to help you maximize your earnings.
What Happens To Your Credit Scores When You Cancel Your Credit Card?
Depending on the credit scoring model used, around 15% of a credit score calculation is based on the credit history or age of the credit accounts. As such, if you cancel your current credit card to switch to another, it may negatively affect your credit scores. This is because it will lower the average age of your credit accounts.
Generally, it is recommended to keep old credit card accounts open, unless there’s a high fee associated with it. If there’s no fee, keeping your credit card account open and active (ie. 1 to 2 transactions a month) can be beneficial for your credit.
What Happens To Your Credit Scores When You Apply For A New Credit Card?
When you apply for a new credit card, your creditor will want to see a copy of your credit report. This is known as a “hard inquiry”. When this happens, your credit scores may be negatively affected. It’s important not to apply for too many credit cards to protect your credit scores from too many hard inquiries.
How Do Credit Limit Changes Affect Your Credit Scores?
Cancelling your current credit card to switch to another one with a lower credit limit can affect your debt-to-credit ratio, otherwise known as a credit utilization ratio. If you have a lower credit limit, your debt-to-credit ratio may increase if you continue to spend at the same pace.
Generally, a lower credit utilization ratio is better for your credit, and your credit limit plays a key role. The more you spend, the higher your debt-to-credit ratio may be, which can have a negative impact on your credit health.
For example, if your old credit card had a credit limit of $5,000 and your new credit card has a credit limit of $3,000, it will impact how your debt-to-credit ratio is calculated. If you have a balance of $1,000, your debt-to-credit ratio would be 20% for your old credit card and 33% for your new credit card.
However, if you can get a higher credit limit on a new card, your credit utilization ratio may be positively impacted.
Switching Credit Cards With The Same Bank
Taking out a new credit card with the same bank may be easier than applying with a new creditor. If you stick with your current bank, the new credit card will be under the same bank account. In this case, you may not have to re-apply for a credit card or have a credit check performed. You may even be pre-approved for certain credit cards.
That said, you probably won’t be able to take advantage of any introductory welcome bonuses that new clients have available to them.
Switching Credit Cards With A Different Bank
The biggest perk of applying for a credit card with a different bank is that you’ll benefit from introductory signup bonuses, such as a 0% introductory APR, free welcome bonus points, or waived fees in the first year.
Just be aware that you’ll likely need to go through a new credit card application process. This means the creditor may perform a credit check, which may pull your credit scores down temporarily.
Tips On Switching Credit Cards
Before you switch your credit card for a new one, consider the following tips:
Understand The New Credit Card Eligibility Requirements
Make sure you’re eligible for the new credit card before going through the application process. More specifically, look at factors like income and credit score requirements, and ensure you meet them. If you do, you may get instantly pre-approved for the credit card when you apply.
Weigh The Rewards Against The Costs
Find out what the rewards program is like and what the earning rate is per dollar spent. Calculate how much you’ll earn in rewards based on your average spending. The rewards should far outweigh the cost of your credit card fee.
Choose A Card That Aligns With Your Spending Habits
Look for a credit card that offers higher reward points in spending categories where you spend the most money. This allows your dollar to go further.
For instance, some rewards programs may offer higher earning potential when you spend your money at grocery stores, while others are designed to help you rack up more points every time you fuel up at the pumps. Choose a card that aligns with your spending habits.
Look For A Card With A 0% Introductory APR
If you carry a large balance on your current credit card, consider getting a credit card with a 0% introductory APR.
It can be tough to pay down a large balance with a high-interest rate, so a credit card with a 0% introductory APR can help save you a lot on interest. When you transfer your balance to the new card, you’ll have the chance to avoid interest charges as you chip away at your outstanding balance.
Final Thoughts
There are plenty of good reasons to switch credit cards, including securing a lower interest rate or taking advantage of a better rewards program. Just make sure you’ve done a little homework so you’re making a move for the better, and verify how your credit may be affected. If your current card isn’t meeting your needs, find one that does.
