Loyalty is generally considered a good thing, but in the credit card world, that quality could be costing you potential rewards. About 32 million U.S. credit cardholders haven’t changed their preferred credit card in 10 years or more, and another 21 million have never switched, according to a new CreditCards.com report.
There are two major camps when it comes to credit card usage — people who haven’t changed their favorite card in a long time and those who recently signed up for a new one. If you’re in the former group, it might be time to consider seeing what else is on the market. Cards are offering signup bonuses, cash back and travel rewards, and a sign-up bonus menu that is "pretty darn strong,” says Matt Schulz, credit card analyst for CreditCards.com.
Why to Shop the Market
“It’s absolutely a good thing to shop around for [credit cards] just like you would shop around for a new refrigerator,” says Beverly Harzog, credit card expert and author of The Debt Escape Plan. If you haven’t compared rates and other offers in the last year or two, it’s time to carve out some time to do it.
Even if you don’t intend to change cards, getting informed about what else is out there can help you negotiate better terms from your current credit card issuer. “And banks are as willing as they’ve ever been to negotiate on things like credit limits, APRs and late fees,” says Schulz.
Figure Out What You Want
The first thing to ask yourself is if you’re the type of person who is suited to a rewards card. They generally have higher interest rates, so if you think you’ll end up carrying a balance, they’re probably not for you. The chances that you pay more in interest than you earn in rewards is fairly high.
If you don't carry a balance, your goal is to select among rewards. Different cards have different rates, fees and perks — so start by taking an inventory of your lifestyle, says Harzog. Do you travel a lot? If so, is it via airplane or car? And if it’s via airplane, do you stay loyal to one airline or fly with many? This will help narrow down the type of rewards card that’s best for your habits.
How to Get Started
There are a number of websites — CreditCards.com, NerdWallet.com, Bankrate.com, and LowCards.com — where you can compare card to card. But understand, “websites have relationships with different credit card issuers, so every credit card issuer isn’t going to be on every site,” says Harzog. That means visiting at least a couple of these sites is necessary to get the lay of the land. Another thing to remember? Sometimes there’s payment for placement — so before being blown away that a card is at the top of the results list, look at the details of what it offers.
If you’re looking at a card with an annual fee — which can range from around $49 to near $500 — do your best to be sure the rewards you’ll earn will exceed it. “You want to be sure that you’re still going to profit from this card,” says Harzog. Many companies will waive the fee the first year, and if that’s not automatic, call them and ask — ideally with examples of other card offers you’ve received in the mail that will.
When to Hold Off
Worried that applying for a new card could mean taking a credit hit? Generally, each credit card inquiry you apply for could knock two to five points off your credit score. That means, it shouldn’t make much of a difference unless “you’re barely on the cusp between fair and good credit,” says Harzog. Just make sure you don’t apply for multiple credit cards at one time — it can make you look desperate to lenders. Better to leave a few months between each application.
And if you’re planning on applying for a mortgage, it’s a good idea to not only not apply for new credit, but to stop most credit card activity (ahem, including adding to the debt you're not paying off each month) about six months ahead of time, says Harzog. That way, you can pay down any debt and keep your utilization ratio low to boost your score. Keep on doing this even after you’ve been pre-approved.
What to Keep in Mind
Okay, so maybe you’re applying for a new card — but what do you do with your old ones? Generally speaking, if there’s no annual fee on a credit card, there’s no need for you to cancel it. “The longer you have a card that has a positive history for it, the more it helps your credit,” says Schulz. And that’s especially true for your oldest card, since length of credit history accounts for 15 percent of a FICO score. Harzog suggests putting an automatic payment on your oldest card just to keep it “active and alive.”
If there’s a large annual fee on the card and you don’t use it anymore, that’s where the picture gets a little confusing. Harzog says to think carefully before making any moves, though “the more credit you have, the less impact it’ll have on you.”
And if you do decide to close one card, consider doing so after applying for another card so as not to significantly increase your credit utilization ratio. Schulz says the impact of closing your oldest card if you don’t use it anymore and it has a large annual fee might not be as significant as people worry that it will be. The credit history for that card should be available to the credit score algorithm for up to 10 years even after you close the account, so there likely won’t be an immediate impact on your score.
With Hayden Field