Dear Let's Talk Credit, I've been a cardholder with a major bank credit card for a number of years. I've recently come to the conclusion that the fee I pay on this card is not worth it. However, I'm interested in closing my fee-based card for a no-fee card with the same issuer. I currently have excellent credit and may be in the process of purchasing a condo. How would this affect my credit score if I closed one account to open another? -- Jennifer
Dear Jennifer, To ensure that you have the highest score possible when you shop for your mortgage, I suggest you put off making any changes to your credit until after you have been approved and close on your condo purchase. Even a drop of five points could make a big difference when qualifying for the best available mortgage interest rate. For example, if your FICO score is 760 rather than 759, you could save $14,000 over the life of a 30-year fixed-rate loan of $300,000.
That said, with excellent credit, closing one credit card account in good standing and opening a different credit card account normally shouldn't be a huge concern. Opening a new account will sometimes cause a small dip in your credit score for a short period of time.
When you apply for new credit, the creditor reviews a copy of your credit report, which appears as an inquiry on your credit report, also known as a hard pull. Generally speaking, one new inquiry on your credit report may drop your FICO credit score five points. Inquiries may cause a more substantial drop for those with a short credit history or few accounts.
You are smart to review your credit card accounts to ensure they continue to meet your purposes. Like you, consumers who pay an annual fee on cards should be sure that the benefit received from the card is worth the fee charged each year. You should review any fees associated with your cards, as well as your current interest rate on cards where you carry a balance. Many card issuers are offering introductory 0 percent interest rates and/or 0 percent, no-fee balance transfers. It may be worth transferring balances to a new card if you can pay off the balance within the 0 percent interest period.
But let me repeat: Do not close any card account until after your home loan has closed. Lenders can pull your credit score at any point during the home-buying process, so you want it to be in the best possible shape all the way up to closing day. Once you have the keys in your hand, you are free to do what you want with the card. At that point, your credit score fluctuating a few points should not worry you.
Let's keep talking!
See related: 7 times it's OK to cancel a credit card