The other day, a reader named Annie wrote in to ask me for advice on dealing with a new annual fee on her Capital One credit card account. She wrote:
What's your take on Capital One's new policy of an annual fee for existing cardholders? This is my oldest card, and I don't want to close it because it will cause my credit score to drop, but a $60/year fee is insane.
While I'm not in the business of giving specific advice, I can provide some general feedback here. For starters, I agree that a $60 annual fee seems excessive. That being said, I do have a card with a $150 annual fee.
I know what you're thinking... $150? Are you crazy? No, not really. The card in question is the Amex Delta Platinum SkyMiles card, and I more than make that fee back in the form of free checked bags and bonus MQM miles which, unlike regular reward miles, count toward frequent flyer status upgrades.
Anyway, I digress. The point here is that there are rare instances in which I'm willing to tolerate an annual fee, but only if the benefits outweigh the cost.
Assuming that you don't want to pay the annual fee, however, is it safe to close the account? Annie is right that doing so might have a negative impact on her credit score, but will it really be a big deal?
I've talked in the past about how your FICO credit score is determined, but here's a quick refresher... There are five major components of your credit score. In order of importance, they are:
- Payment History - 35%
- Amounts Owed - 30%
- Length of Credit History - 15%
- New Credit - 10%
- Types of Credit Used - 10%
By closing a long-standing credit card account, you're primarily affecting the length of your credit history, which is a relatively minor component of your credit score.
If you replace this card with a new one, you'll also take a small hit in the "new credit" category. Here again, this is a minor component of your overall score.
Even though these two categories account for somewhere in the neighborhood of 25% of your credit score, closing an account and opening another won't decimate them, so we're probably only talking about a handful of points.
In other words... If it were me, I wouldn't get too caught up in worrying about the effects on my credit score. Rather, I'd decide the best course of action based on the value I'm receiving from the card in question, and make a decision from there.
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