I had a reader Jackson email me the other day asking about switching credit cards. It turns out that his current main credit card is being phased out and replaced with one whose rewards structure is less rewarding for him. The one thing holding him back is the thought that switching credit cards would hurt his credit score. As we traded emails, I learned that he recently bought a house, had a great credit score, and was generally very fiscally responsible. The only reason why he was concerned was because the whole credit scoring system was a black box.
When you apply for a new credit card, you add a hard inquiry  to your report which will lower your credit score. The impact of that score is pretty small, unless it takes a good credit score  and knocks it down into a lower tier. That drop, of course, only matters if you plan on getting a new loan, which Jackson isn’t doing. He bought a house a year ago and doesn’t plan on getting any more loans.
The one thing he can do to minimize the impact of the change is to keep the old credit card around instead of canceling. This will lower his credit utilization  by increasing his total credit limit. That will matter less than the inquiry but every little bit counts.
You’ll note that throughout this entire explanation, I wasn’t able to use any real numbers. No one can say for sure how many points you lose for a hard inquiry, or what percentage utilization you need to be “good,” that’s all be design. I think an ideal world would have us all understanding how the credit score is calculated, but you can bet the money in your wallet there are lobbyists fighting against that.
(Photo: danesparza )