Switching Banks, Switch Credit Cards, too?

Question

I'm moving to a Credit Union from my long-term bank. I have two credit cards already with the bank, and one card has a balance on it. I would prefer to consolidate and cut myself completely off from my old bank and just transfer the balance, but is that the right choice especially in regards to credit? My initial thought is that dropping two credit accounts, balance or not, and opening a new one would negatively impact the "age" aspect of my credit, but not sure if that's the case and if so, how much that should be considered.

Answer 1

Age of credit does not take into account the open/closed status of the accounts (that's a myth). Rather, it is the average age of all accounts on your credit history, open or closed. The only way it's going to impact you is down the line in seven or so years, the closed accounts will eventually fall off the report; but that's plenty of time to establish a new account. Of course, depending on how you use credit it's possible that at that point you will take a bit of a hit, but if you continue using it sparingly as you seem to be, it shouldn't be too big of one, especially if they're not all that old now.

You will though take a short-term hit for opening the new account, since your average age of open accounts will be instantly cut in half. As to whether that would have much effect on you, depends on your specific details, though I suspect you'd feel that mostly for the first year or so and not too much afterwards, regardless. Much of the hit would be for the hard credit inquiry, which lasts for two years at most (the score hit is usually gone by 1 year).

You would also take a hit if your total available credit decreased. As long as you're well within your means, having more available credit is better as it lowers your utilization - i.e., if you have $20,000 in revolving credit available, you're a better risk than if you have $5,000 in revolving credit available, since you have more of a cushion (say you have $500 charged at any one time, you'd be 10% utilized in the latter scenario and only 2.5% utilized in the former).

Ultimately none of this should hurt your score too much; as such I think you should do what is best for your overall financial well being. If having an open credit card (with hopefully no fee) is a risk for you, then cut it up and close the account. If you think you're pretty good at managing credit, and the balance on one card is just a temporary blip, then it's okay to keep it as far as I'm concerned.

Do take into account the costs of transferring balances; the new card might have a 1.5%-3% fee, or even more. Make sure you're familiar with that, and with any "promotional" rate. Credit union cards are often very good overall, but they're not perfect any more than any other card. Read your account documents carefully.

Answer 2

I agree. First, credit card accounts don't just "move" like that. They are driven by trust and experience of the bank with you. That doesn't transfer very well and your bank has no profit motive to help another bank evaluate you. They do of course report to credit reporting agencies, but that does not carry much detail (at least not in the favorable category.)

Second I think you are right, closing the accounts and opening new ones will wreck the age of the active accounts, though the closed account will remain on record for 7 years. Both favorable that you had it, and a tiny bit unfavorable that it was closed.

Third, like I say credit accounts don't "move", this equals closing an account and opening another, and the credit industry does not treat this as a wash. The opening procedure requires applying for credit, which causes a harsh short-term burn on your credit report, especially if you do two at once. The purpose of the burn is to keep a desperate person from applying for 9 (or even 2) credit cards at the same time.

Lastly there are serious balance-transfer fees you would need to pay, on the order of 2-5% of the balance. And the transferred money will count as a cash advance not a purchase, so it will get a different interest rate and different payoff priority.

And even after all that, it may be a lost cause. There's a very good chance you'll find that your new bank doesn't even run its own credit card operation anyway, and essentially "brands out" their name to a different company. You might even end up going from company X right back to company X! The dead giveaway is walking into a branch and asking to talk with a teller or banker about your credit card account, and they tell you to call the 800 number. Or the banking and credit card apps are different.