diff --git a/README.md b/README.md
index 0a9af61..4645899 100644
--- a/README.md
+++ b/README.md
@@ -205,6 +205,10 @@ RESULTS=$(valyu answer "latest rate decision" --quiet)
 VALYU_API_KEY=your_key valyu search web "query" --json
 ```
 
+> **Key precedence:** `--api-key` flag → your `valyu login` key → `VALYU_API_KEY`. A logged-in
+> key takes precedence over the env var, so you don't need to unset `VALYU_API_KEY` after
+> running `valyu login`. `VALYU_API_KEY` still applies when you haven't logged in (e.g. CI).
+
 ### Multiple profiles
 
 ```bash
diff --git a/package.json b/package.json
index c7ef4f2..0e381fe 100644
--- a/package.json
+++ b/package.json
@@ -1,6 +1,6 @@
 {
   "name": "@valyu/cli",
-  "version": "1.2.0",
+  "version": "1.2.1",
   "description": "The search CLI for knowledge workers",
   "license": "MIT",
   "repository": {
diff --git a/src/__tests__/config.test.ts b/src/__tests__/config.test.ts
index 1a480ea..0ef2626 100644
--- a/src/__tests__/config.test.ts
+++ b/src/__tests__/config.test.ts
@@ -1,24 +1,46 @@
-import { describe, it, expect, afterEach } from 'vitest';
+import { describe, it, expect, beforeEach, afterEach } from 'vitest';
+import { mkdirSync, mkdtempSync, rmSync, writeFileSync } from 'node:fs';
+import { tmpdir } from 'node:os';
+import { join } from 'node:path';
 import { resolveApiKey, maskKey } from '../lib/config.js';
 
 describe('resolveApiKey', () => {
   const originalEnv = process.env.VALYU_API_KEY;
+  const originalXdg = process.env.XDG_CONFIG_HOME;
+  let tmpRoot: string;
+
+  // Point the config dir at a fresh empty temp dir so tests are hermetic and
+  // never read the developer's real ~/.config/valyu/credentials.json.
+  beforeEach(() => {
+    tmpRoot = mkdtempSync(join(tmpdir(), 'valyu-cli-test-'));
+    process.env.XDG_CONFIG_HOME = tmpRoot;
+    delete process.env.VALYU_API_KEY;
+  });
 
   afterEach(() => {
-    if (originalEnv === undefined) {
-      delete process.env.VALYU_API_KEY;
-    } else {
-      process.env.VALYU_API_KEY = originalEnv;
-    }
+    if (originalEnv === undefined) delete process.env.VALYU_API_KEY;
+    else process.env.VALYU_API_KEY = originalEnv;
+    if (originalXdg === undefined) delete process.env.XDG_CONFIG_HOME;
+    else process.env.XDG_CONFIG_HOME = originalXdg;
+    rmSync(tmpRoot, { recursive: true, force: true });
   });
 
+  // Write a credentials.json into the temp config dir (mimics `valyu login`).
+  const writeLogin = (apiKey: string, profile = 'default', active = profile) => {
+    const dir = join(tmpRoot, 'valyu');
+    mkdirSync(dir, { recursive: true });
+    writeFileSync(
+      join(dir, 'credentials.json'),
+      JSON.stringify({ active_profile: active, profiles: { [profile]: { api_key: apiKey } } }),
+    );
+  };
+
   it('returns flag value when provided', () => {
-    delete process.env.VALYU_API_KEY;
     const result = resolveApiKey('flag-key-value-here-1234');
     expect(result).toEqual({ key: 'flag-key-value-here-1234', source: 'flag' });
   });
 
-  it('returns env value when VALYU_API_KEY is set', () => {
+  it('returns env value when VALYU_API_KEY is set and there is no login', () => {
     process.env.VALYU_API_KEY = 'env-key-value-here-5678';
     const result = resolveApiKey(undefined);
     expect(result).toEqual({ key: 'env-key-value-here-5678', source: 'env' });
@@ -30,6 +52,33 @@ describe('resolveApiKey', () => {
     expect(result?.source).toBe('flag');
     expect(result?.key).toBe('flag-key-value-here-1234');
   });
+
+  it('prefers the logged-in key (config) over VALYU_API_KEY', () => {
+    // The headline fix: a `valyu login` key must win over an ambient env var so
+    // users do not have to unset VALYU_API_KEY.
+    writeLogin('val_login_key_1234567890');
+    process.env.VALYU_API_KEY = 'env-key-value-here-5678';
+    const result = resolveApiKey(undefined);
+    expect(result).toEqual({ key: 'val_login_key_1234567890', source: 'config' });
+  });
+
+  it('prefers flag over both the logged-in key and the env var', () => {
+    writeLogin('val_login_key_1234567890');
+    process.env.VALYU_API_KEY = 'env-key-value-here-5678';
+    const result = resolveApiKey('flag-key-value-here-1234');
+    expect(result).toEqual({ key: 'flag-key-value-here-1234', source: 'flag' });
+  });
+
+  it('falls back to env when the requested profile has no stored key', () => {
+    writeLogin('val_login_key_1234567890', 'default');
+    process.env.VALYU_API_KEY = 'env-key-value-here-5678';
+    const result = resolveApiKey(undefined, 'ci');
+    expect(result).toEqual({ key: 'env-key-value-here-5678', source: 'env' });
+  });
+
+  it('returns null when no flag, no login, and no env var', () => {
+    expect(resolveApiKey(undefined)).toBeNull();
+  });
 });
 
 describe('maskKey', () => {
diff --git a/src/commands/auth/login.ts b/src/commands/auth/login.ts
index 0e207e9..d0a363d 100644
--- a/src/commands/auth/login.ts
+++ b/src/commands/auth/login.ts
@@ -19,6 +19,18 @@ const API_KEYS_URL = `${PLATFORM_URL}/user/account/apikeys`;
 
 const sleep = (ms: number) => new Promise((r) => setTimeout(r, ms));
 
+// Reassure the user that a pre-existing VALYU_API_KEY no longer shadows the key
+// they just minted (the logged-in key takes precedence - see resolveApiKey).
+function noteEnvPrecedence(): void {
+  if (process.env.VALYU_API_KEY) {
+    console.log(
+      pc.dim(
+        '  Note: VALYU_API_KEY is set in your environment - your logged-in key now takes precedence and will be used.',
+      ),
+    );
+  }
+}
+
 export const loginCommand = new Command('login')
   .description('Authenticate the CLI (device flow by default; mints a scoped Valyu key)')
   .option('--key <key>', 'Authenticate with an existing API key (manual / CI mode)')
@@ -149,6 +161,7 @@ async function deviceLogin(
       p.outro(
         `Logged in as ${pc.cyan(token.key_prefix)} - key stored for profile ${pc.cyan(`'${profile}'`)}`,
       );
+      noteEnvPrecedence();
       return;
     }
 
@@ -254,5 +267,6 @@ async function manualLogin(
     outputResult({ success: true, config_path: configPath, profile: profileName }, { json: true });
   } else {
     p.outro(`Logged in. API key stored for profile ${pc.cyan(`'${profileName}'`)}`);
+    noteEnvPrecedence();
   }
 }
diff --git a/src/lib/config.ts b/src/lib/config.ts
index 96c7f82..2a3b0e2 100644
--- a/src/lib/config.ts
+++ b/src/lib/config.ts
@@ -65,15 +65,24 @@ export function writeCredentials(data: CredentialsFile): void {
 }
 
 export function resolveApiKey(flagValue?: string, profile?: string): ResolvedKey | null {
+  // Precedence: explicit flag > local login (config) > ambient VALYU_API_KEY env.
+  //
+  // A `valyu login` is a stronger, deliberate signal of intent than an ambient
+  // env var, so the logged-in key wins - otherwise a user who already has
+  // VALYU_API_KEY set would run `valyu login`, mint a scoped key, and silently
+  // keep using the old env-var key. The env var stays as the fallback for the
+  // no-login case (CI, unauthenticated), so those flows are unchanged. `--api-key`
+  // remains the ultimate override for one-off / scripted use.
   if (flagValue) return { key: flagValue, source: 'flag' };
-  if (process.env.VALYU_API_KEY) return { key: process.env.VALYU_API_KEY, source: 'env' };
 
   const creds = readCredentials();
-  if (!creds) return null;
+  if (creds) {
+    const profileName = profile ?? creds.active_profile ?? 'default';
+    const p = creds.profiles[profileName];
+    if (p?.api_key) return { key: p.api_key, source: 'config' };
+  }
 
-  const profileName = profile ?? creds.active_profile ?? 'default';
-  const p = creds.profiles[profileName];
-  if (p?.api_key) return { key: p.api_key, source: 'config' };
+  if (process.env.VALYU_API_KEY) return { key: process.env.VALYU_API_KEY, source: 'env' };
 
   return null;
 }