Revealing Credit Card Interview – Senior VP of Credit Approval & Risk – Part 2

I recently happened to be on a flight from Prague (PRG) to Nice (NCE), randomly seated next to a Senior VP, Credit Approval & Risk, at one of the largest US card issuers. Guess what? He also turned out to be a huge mileage junkie! We got to talking about our favorite flights, cabins, destinations, hotels, redemptions, etc., everything but credit cards. As nice as he was, I could not pass up the opportunity to ask him some direct questions about one of our favorite mileage earning activities – credit cards. He politely asked if I could send an email to his personal account with some questions, rather than discussing them on the flight. Yesterday, we covered his responses with respect to credit score impact after applying and applications for multiple cards. Today, we cover cancellation and the future of loyalty cards. Part three, reader questions is tomorrow!

3. When is it safe to cancel a mileage / points card? OK, let’s start with the good news. Canceling a business account will NEVER impact your score (no matter how old the card is) as long as you have not defaulted on the account. Now, I can get into the many benefits that our business cards provide and why you shouldn’t toss them away, but if you are only concerned about your score, these have no impact. Now, personal cards, those are a different story. Let’s go back to our credit pie from yesterday – new credit accounts for 10% of your score, credit history accounts for 15% of the score, payment history makes up 35% of the score, amounts owed 30%, and types of credit 10%. Canceling a personal card will impact the credit history and the amounts owed sections of the pie.

Credit History – this is literally the collective age of your accounts. I love reading about this one on the travel and points blogs as you guys always get it wrong. Your credit score will NOT drop by closing your oldest account. Why? The score drops when you APPLY for a new account (decreasing the average age of your accounts), not when you close accounts. What? Wait, shouldn’t canceling the card also decrease the average age of your accounts? What everyone misses here is that canceled cards generally stay on your report for a period of 10 years after cancellation, continuing to contribute to your average account age. BUT DON’T GO REPLACING YOUR OLD CARDS, we still love to see consumers who have very old cards. Generally, despite what I just mentioned, I’d recommend holding on to your two oldest cards. If they charge an annual fee, transition them to a product that has no fee (transition not cancel and replace). Transitioning is a word we use to describe consumers who are keeping their account but changing the product type associated with it (it does not impact your credit age, the original one is maintained). 

Amounts Owed – HUGE IMPACT by canceling your cards, though the extent of the impact is determined by how many cards you have and the overall credit granted to you. If you’re a college student (I know a lot of the new point enthusiasts are), someone who has just started signing up for cards, or someone with only a few cards, you need to really watch out for this. Let’s talk about your credit utilization ratio – a percentage of the total amount of your credit you use against what has been granted to you. If you have just a few cards, then canceling one will cause a significant decrease in your overall credit and quite a large increase in your credit utilization (another NO NO). This can KILL your score. If you have just a few cards, make sure you are approved for a similar credit limit on another card before canceling your current card (thereby mitigating the overall impact to your utilization rate). If you have several cards, the impact of canceling one card will be less harsh given that the credit associated with the card should account for a smaller percentage of your overall credit. Hence, save your credit allowances by transitioning them to another product type rather than flat out canceling.

4. What can we expect with regards to sign-up bonuses and points/miles cards in the future? That’s a tough one. Obviously for us, consolidation in the travel industry has been a mixed bag. Each combination results in one less player and potential travel partner. In my eyes, it’s also a bad thing for your readers. When there’s only three main legacy airlines, sign-ups will likely not be as generous. There’s less motivation for one of the big three to go rogue and offer a super bonus as compared to the standard bonuses of their peers. Consider the issuers in the same manner, we’ll have three for three carriers. That’s not to say that it won’t happen, and what I think might force them will be the internal loyalty programs of the issuers. Those programs are improving each day and if one of them was to offer a huge bonus, the airlines might be tempted to increase their offers as well. These programs used to be considered the step-children of the loyalty industry, but there has been fantastic consumer adaption over the last two years. These programs tend to offer more partners, immediate transfers, and greater overall value per dollar.