If you're like me, my wife, and most of the credit card users in the United States, you received a little note from your lender in 2009 outlining "simple changes" to your card's terms and conditions. At my house, our lenders' contract adjustments included:
1. Hiking the interest rate on one card to 33%
2. Dropping the credit limit on another card from $5,000 to $2,000
3. Reducing cash-back rewards by about half
4. Adding fees for frequent-flyer-mile participation
5. Canceling one credit line without our prior knowledge
Our reaction to each one of these letters was probably like yours: lots of unprintable cussing, followed by the shredding of at least two platinum cards. However, I remembered that a knee-jerk reaction to credit card changes rarely ends well. In fact, I can think of five reasons why you may just want to accept the "new normal" of American credit. Put the phone down if your card falls into any of these categories:
1. Your Rate-Jacked Credit Card Was Your First
I loved the student credit card I got when I was a college freshman. I got a free radio. And I regret canceling it when the rate got jacked, because I didn't know then that the average account history makes up a big chunk of your credit score. Having a 20-year record with a single lender would definitely have improved my FICO.
2. Your Credit Card Balance Is Under 10% of Your Credit Limit
If a lender springs a new annual fee or a higher interest rate on a card with most of its credit line available, breathe into a paper bag before cutting it up. Credit utilization counts for a large portion of your credit score. Your ratio could skyrocket, triggering higher interest rates and lower limits at some of your other banks.
3. Your Balance Is More Than Zero
If you owe $1,000 on a $2,000 credit limit, your utilization will jump from 50% to 100% after cancellation. That's because lenders report the amount owed on cancelled accounts as the maximum credit line. Some scoring models may even state your overall utilization over 100%.
4. You're Shopping for a Car, Home, or Insurance
Sudden changes to credit status can make it harder for lenders to lock a low mortgage rate or a favorable auto loan deal. Many insurance carriers also look at credit reports to determine life, home, and auto policy premiums. A flurry of cancellations can make you look like a higher risk to some companies.
5. You'll Need a Balance Transfer to Handle Your Old Card's Payoff
If you've preserved enough available credit on your other cards to absorb a rate-jacked balance, you'll still want to cool your jets. No-fee balance transfers have nearly disappeared, and you'll pay as much as five percent up front to bounce a balance from card to card. If you decide to shop for a new balance transfer card, be sure to do your research and find the best deal.
That said, go ahead and break the rules when tempting credit lines endanger your well-being. The old "credit card in a block of ice" trick doesn't always work--I've seen grown Americans wreck merchant terminals with freezer-burned gold cards. If surviving a drop in your credit score offers a better path than the siren song of an open credit line, cancel your card. Remember to seek the assistance of a fee-based financial advisor or a non-profit credit counselor if you think you need real help with your finances. For more information on fee friendly cards check out our editor's picks for the Best Credit Cards of 2009.