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Credit score will likely suffer when you cancel that WorldPerks Visa card

Posted on May 14th, 2009 – 10:55 AM
By James Shiffer

My colleague Suzanne Ziegler has bravely taken on the many questions about the phase-out of WorldsPerks Visa cards, one of the effects of Delta’s takeover of Northwest Airlines. That’s why I turned to Suzanne when Sam Richter, a business consultant in Minneapolis, put the following question to Whistleblower:

I have applied for and been approved to go on the new Delta AmEx card. From the literature I’ve read, I will automatically be converted to the new USBank card, and will receive my new card USBank card in the mail in the coming weeks. As I only want the Delta AmEx card so I can continue to earn miles, I want to cancel the USBank card. However, I’ve read that if I cancel a credit card, that my personal credit score will be negatively impacted.

What are we as consumers supposed to do? This is something that will impact tens-of-thousands of your readers. Without proper guidance, as I understand it (although I certainly could be wrong), all of us could see our credit scores decline if we don’t renew the USBank Visa card, even if we don’t want it.

Richter was right, according to Suzanne’s research into Richter’s question. Here’s her report (FICO, by the way, is the company that sells the formula that’s used to create consumer credit ratings):

In short, your credit CAN be harmed if you cancel a credit card or open a new one.

More detail on that from FICO in a minute but here’s what U.S. Bank says. The WorldPerks Visa card will die 30 days after it flips to FlexPerks. That date has already been communicated to cardholders. The cardholder can elect to cancel that card, which could have a negative impact on his or her credit score. Applying for a new line of credit—as in the American Express SkyMiles card—could also have a negative impact on credit rating. If you decide to stay with Visa, your current WorldPerks Visa will “roll over” to the new one, which should not affect your credit rating (because you are not applying for new credit).

FICO spokesman Craig Watts said it’s important for people to know that FICO scores bob up and down more often than most people realize so a small dip might not have much impact. “If you maintain good credit habits over time, the minor ebbs and flows of your score won’t be — shouldn’t be — a concern,” he said.

So how could closing a credit card account lower a FICO score?  According to Watts:  One of the factors that affects FICO scores is revolving credit account utilization, or the percent of available credit that someone currently is using (outstanding debt divided by credit limit).  If the person has more than one credit card, the score takes into account the utilization of each individual card and the aggregate utilization for all active credit cards on the credit report.  So when a person closes a credit card with a zero balance, they removes available credit from the utilization calculation without reducing their overall outstanding balance. This means their overall utilization rate could rise in response —  if they happen to be carrying significant balances on other credit cards.  Higher utilization rate corresponds statistically with greater credit repayment risk, so it can lower their FICO score.

If a person wants to make sure their FICO score doesn’t change in response to their decision to close a credit card account, Watts said, the solution is simple: maintain zero balances on all active credit cards. This produces a utilization rate of zero, and closing one or more cards won’t change it.

To protect their score, FICO advises consumers to: pay all bills on time, keep credit card balances low relative to credit limits, and take on new credit sparingly and only when needed.

Although she’s been inundated by reader questions about the credit card changeover, Suzanne tells me she welcomes all tips and questions. But she has other duties, so it will likely be weeks before she returns to the subject.

This entry was posted on Thursday, May 14th, 2009 at 10:55 am and is filed under Buyer beware. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

7 Responses to “Credit score will likely suffer when you cancel that WorldPerks Visa card”

  1. Kevin MN Says:
    May 14th, 2009 at 11:54 am

    So FICO says if you want a better credit score, you should carry no balance. Thats real funny, I had two cards cancelled at the beginning of the “Financial Crisis” because they had no balance on them, which cut my available credit in half, severly hurting my credit score. What is even worse is the fact that credit scores are actually used for hiring decisions. So basically, I am less hirable because the CC companies couldn’t correctly manage their own assets. Who gave FICO this power? There needs to be signifcantly more transperancy on credit scores and the elimination of actions that can negatively affect credit scores that are not directly caused by the consumer. The numbers may seem small for each individual customer, but how many World Perks cardholders are there currently? How many of them will have small drops in their credit scores? What will the aggregate cost of the increase in lending costs for these consumers? It will probably be in the Millions of dollars.

  2. Island Despot Says:
    May 15th, 2009 at 4:06 am

    I think the organizations that are able to access
    our credit information should be severely restricted.
    A potential employer has absolutely no need or right
    to that type of personal information. They can’t ask
    if I’m married, if I’m gay, or when I was born but they
    can check my credit rating? WTF?

  3. Chaz22 Says:
    May 15th, 2009 at 6:00 am

    Go ahead and cancel the card(s). I make a habit ot cancelling credit cards. Why? Well, every now and then I get offers in the mail….”20,000 miles if you sign up for our card and spend $700 dollars in the next 4 months.” or something like that. The catch is that the card is free for 12 months and then there is a $50 fee. So I cancel the card after 11 months. I’ve done this at least 10 times to get the miles and avoid the fees. Does it affect my credit rating? In the real world, I doubt it. I continue to get offers and have never been turned down for credit. I pay my bills on time and cancel my credit cards on time. It works.

  4. HikingStick Says:
    May 15th, 2009 at 3:21 pm

    It’s not only the balance vs. available credit calculation that will come into play. The average age of credit accounts also is part of the score. So, closing a long-open account and opening a new one could significantly shift the average age of your credit accounts, further impacting your score.

  5. Chris A Says:
    May 15th, 2009 at 3:43 pm

    You need to read the the information before responding. FICO said the way to avoid the impact is to always pay your balance to zero, so when you cancel you won’t impact the debt to credit ratio. If you always keep a zero balance your debt ratio is 0%, if you cancel something then it will still be zero. If you have avalable creidt of $10,000 and you’re using $5000 and your debt ratio is 50%, if you cancel 5000 worth of open credit, your ratio goes to 100% which several impacts your FICO score.

    And yes lots of places can and do look at your credit report, the reason is because it has been proven to be a direct indicator of personal responsibility. If you can’t be responsible enough to repay the debts that you have incurred, how can your be trusted to be responsibile with a company decisions. Credit is something you control, being gay, african american or otherwise are not and have no indicator of your responsibility.

  6. Aubrey Kohn Says:
    May 16th, 2009 at 3:59 pm

    Chris A claims that credit is something I control,
    but this is not true if credit card companies are
    changing the terms of my accounts, or canceling my
    accounts because of their bad management practices.
    In fact, the FICO score is mostly outside of my
    control. I have never failed to pay anything I
    agreed to pay, in my entire life. Yet, I can be
    refused a job or a home in favor of someone else
    who has a much worse credit record but a higher FICO
    score. The entire FICO system is a criminal enterprise.

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    July 10th, 2009 at 4:02 pm

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