As your life changes, so should your credit cards. The travel credit card you used during your university gap year might not suit you after you settle into a full-time job, marry and have a family. A cashback credit card might be better.
You can ask your card issuer to switch you to a more suitable credit card – however, in many cases, the best deals are only available if you get a new card from a new issuer. If you want the cards you carry to fit your life, here are 5 things you need to consider before you change a credit card:
Know what kind of card you need
Buying a home or car soon? Don’t apply for a credit card
The card issuer might turn you down
That 0% introductory rate is only temporary
Be smart about miles and rewards
John Breyault, vice president of public policy, telecommunications and fraud for the National Consumers League stresses how important it is to do some observations before applying for a new credit card.
For example, if you want a cashback card for everyday purchases like groceries and petrol, a supermarket reward card might be a good fit. If you’re looking at getting a travel or airmiles credit card, make sure it works with your favourite airline and hotel.
If it’s for a balance transfer, you have to be sure the credit limit on your new card is high enough for the amount you want to transfer. If not, “your request for a new card so you can transfer that balance isn’t going to work,” says Linda Sherry, director of national priorities for Consumer Action.
After you’ve done your research and decided which card you want, hold off on applying if you plan to make a big purchase, like a home or car, within 12 months. If you’re selective with applications, you can get what you want and minimise potential damage to your credit score.
When you ask for a new account or an increase to your credit limit, the issuer does a hard search into your credit history – and that in turn can lower your credit score.
“But if you have good credit, a lengthy credit history and a number of accounts, a hard search should shave only a few points off your score”, says Ethan Dornhelm, vice president for score and analytics at Fair Isaac Corp., developer of the FICO credit score.
Be prepared: Your issuer might not agree to give you another card.
“If you have a £10,000 credit limit with one company, they may not want to give you another (card) with a large credit limit,” Sherry says.
You could run into the same problem with a different card issuer if you have a lot of credit available already. “Take stock of what you have, because that is going to affect what they give you,” Sherry advises.
You may want to close some of the card accounts you’re not using, she says. “Because available credit is really what scares them.”
But don’t close out your oldest accounts, Sherry says, because that credit history helps your score.
Dornhelm says to look at your available credit, versus how much you’re using every month. This is your credit utilisation ratio. For example, if you have £10,000 credit available across all of your credit cards and overdrafts, but you only use around £2,000, you have a credit utilisation ratio of 20%. Lenders want to see a low percentage, so if closing accounts pushes your credit utilisation ratio above 30%, that could hurt your chances of getting a new credit card.
A super-low interest rate that comes with a new card, such as 0% on balance transfers or purchases, is called a teaser rate. Depending on the card and your credit score, that introductory rate might last for just a few months or as long as 3 years. After the teaser rate ends, the card’s interest rate will revert to the card’s standard APR, which is usually between 20% and 35%.
Be careful with teaser rate cards: if you fail to make the minimum monthly repayment, or go over your credit limit, the card issuer can immediately cancel your low-interest deal and put you onto the card’s standard APR. If you’ve just transferred a few thousand pounds, you’ll be on the line for some very large interest repayments.
If you want a balance transfer card, do the maths before you apply. Breyault says to ask these questions:
How much will you pay in fees? Usually, the longer the teaser rate duration, the higher the fee.
What’s the balance transfer APR, and how long will it last?
How much would you pay each month to clear the balance before the teaser rate expires, and what’s the total in fees and interest?
If you can’t pay off the balance during the teaser-rate period, what will the ongoing APR be?
How much could you afford to pay monthly, and how long would it take to pay off the balance?
What would be your total payout, including fees and interest?
When you answer those questions, you’ll know the true cost of a balance transfer card and can comparison shop, Breyault says.
Need an airmiles card?
Miles are almost a form of currency, and the issuer or the airline decides what a mile is worth. “And those terms can change very quickly.” Breyault says.
If you’re trading a rewards card (or a card that gives any non-cash reward) for another card that better suits your life, Breyault recommends you ask these questions:
What happens to the miles or points you’ve accrued if you close a rewards credit card?
Do you lose your existing points entirely?
Will the points be accessible for a certain amount of time?
If so, does the expiration date suit you?
Can you get them transferred to another card?
“Those miles are really money in the bank for you, so the big question is, what happens to them?” Breyault says. “Do you have to cash them out after a particular time?”
Switching credit cards may or may not affect your credit score. For example, if you switch your credit card to one with a higher limit, your credit score could go up. This is because your credit utilisation should go down. Credit utilisation is the amount of credit you’re using vs. the amount of credit available to you. If you have a higher credit amount available on your new card but are only using the same amount each month, your credit score could go up!
However, switching cards could negatively affect your credit score if the card issuer doesn’t keep your old and new credit card as a single account. If the old credit card account history is deleted, your overall credit history will decrease. This is why it’s important to ask this beforehand.
You can certainly switch to another bank’s credit card, but you’ll have to close your old credit card first. Make sure that any direct debits are cancelled and outstanding payments cleared beforehand.
It isn’t ideal to have lots of credit cards open at once because it’ll hurt your credit score, as you’ll look riskier to lenders with lots of open accounts. Also, it’ll be much harder for you to effectively manage your money with so many different accounts. This is why it’s best to switch credit cards and close the
old one, rather than getting multiple new cards.