Personal finance expert has explained the real impact of switching cashback credit cards on your credit score
Martin Lewis has offered guidance to anyone holding a cashback credit card in the UK, with leading providers including American Express (Amex), Santander, Lloyds, Barclaycard, Chase and Virgin Money. The personal finance guru spoke out on his new BBC podcast after a listener raised concerns about their cashback card significantly slashing its rewards.
The listener was worried that regularly switching cards could damage their credit rating. Alison asked: “I’m looking for advice around cashback credit cards and how changing them affects your credit score. I currently have a cashback credit card that I’ve held for at least five years. In the first year, it offered a very good cashback percentage, but over time, the rewards have dropped to almost nothing.
“Because of that I’m considering opening a new cashback card elsewhere to take advantage of better introductory offers. However, I’ve heard that closing old credit card accounts can negatively affect your credit score and your history with lenders. I’m also concerned that opening a new cashback card every year and then closing old ones might make be look risky to lenders even though I always pay my balance off in full every month and never carry debt.
“What would generally be the best approach in this situation?” Mr Lewis explained that, in his view, credit scoring is ‘more art than science’ and urged people not to get ‘too hung up’ on it. He stressed that over the long haul, any alterations wouldn’t have a ‘huge effect’. He stated: “There might be a short-term dip in the credit score your credit agencies give you. Remember, they are just a loose indication of how that credit reference sees you as a typical customer, but each firm scores you when you actually apply differently based on its own wish list of what it wants.”
Regarding what lenders look for when calculating credit scores, he noted that loyalty to a provider was only a minor consideration. He highlighted two major factors: Debt ratio – an individual’s unsecured debt as a percentage of yearly earnings. “Well that’s unaffected by you having these credit cards – that doesn’t change – you’re not talking about borrowing more, you’re just talking about using a different credit card for doing so.
“But more interestingly, is your credit utilisation, which is the percentage of available credit used. You could argue that by keeping an extra card open and increasing the amount of credit you use if you’re not spending any more, your debt as a proportion of the credit that you have is actually reduced.
“So there is an argument that having more credit would benefit you. But credit utilisation only tends to be an issue if you’ve got a high debt ratio – if you’re using a high proportion of your income on unsecured debt.”
The rationale for maintaining an open card, rather than credit score concerns, would be new ‘existing customer card offers’. Yet, if these fail to appear, Martin offered straightforward guidance: “My preferred way of doing this, if you don’t need the credit, I would keep it tidy and get rid of old, unused credit cards.
“Don’t do it just before you’re about to make a big application, like if you’re about to get a mortgage. I tend to think of your credit score a bit like savings. You’re saving it up for when you need it. What I always find quite amusing, not in a funny way, but in that it’s a strange way of thinking, is that people get so worried about lowering their credit score, they don’t do anything. The whole point of having a credit score is to enable you to get the right form of credit – to enable you to get a cheaper mortgage, a cheaper balance transfer, to enable you to get a good and high-paying cashback credit card.
“The idea you wouldn’t get a good cashback credit card to protect your credit score is false logic. You protect your credit score so you can get a good high paying cashback credit card.”
To listen to the full podcast click here.
