It’s not uncommon for credit card companies to charge users an annual fee. Sometimes, that fee is $95. Other times, it can be a lot more. Some credit cards, for example, charge hundreds of dollars per year.
You may reach a point when you no longer want to pay a given card’s annual fee. Rather than close your account, you could downgrade your card instead.
When you downgrade a credit card, you switch to a card that’s offered by the same issuer that costs less. You may, for example, be able to downgrade from one credit card with a $95 annual fee to another with no fee at all. Here are some reasons it makes sense to downgrade a credit card rather than cancel.
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1. You’re not getting good value out of your annual fee but still want most of the card’s benefits
Annual credit card fees are often worth paying. A credit card with a costly fee could give you perks like hotel credits and free checked bags that put that money back into your pocket, and then some.
Rather, downgrading a credit card makes sense when you’ve stopped getting good value out of your annual fee. Simply put, if you’re not using your credit card often enough or you’re not scoring enough cash back to recoup your annual fee, then it’s not worth paying.
But there may be a lower-cost or free version of the card at hand that gives you access to the perks you need without having to spend anything just to have the card. That way, you may be able to keep most of the card’s benefits.
2. You want to maintain your credit card limit
If you have a credit card that’s no longer serving your needs, you could always cancel it. But that might result in a hit to your credit score.
One factor that goes into calculating that number is your credit utilization ratio, or the amount of available revolving credit you’re using at once. If you cancel a credit card completely, you’ll lower your total spending limit across your various cards. That could push your utilization into unfavorable territory.
If you opt to downgrade your credit card instead, you may be able to keep your credit limit intact. That could help you avoid a hit to your credit score.
Say you have a $10,000 credit limit across your various cards and you owe $2,000 in total. That puts you at 20% utilization, which isn’t bad (staying at 30% or below is generally good for your score).
But if you cancel one of your credit cards with a $4,000 limit, suddenly, your total spending limit is $6,000. If you owe $2,000, that puts you at 33% utilization, which isn’t as good for your credit score. If you downgrade to a lower tier of that same card, you might keep that $4,000 spending limit.
3. You want to avoid a hard inquiry on your credit report
If you have a credit card with an annual fee that you no longer want to pay, you could cancel it and apply for a new card with no fee attached to it. But applying for that new card will result in a hard inquiry on your credit report. And that usually means seeing your credit score drop by a few points.
A minor dip in your credit score generally won’t be an issue if your score is in great shape to begin with. But if you’re on the cusp of being able to qualify for a loan, the minor drop that comes with a hard inquiry could push you below where you need to be for approval. The benefit of downgrading your credit card is that it generally doesn’t require another hard inquiry on your credit report, since you’re already an approved cardholder.
It doesn’t make sense to keep paying an annual fee on a credit card you don’t use a lot — or don’t use enough to make your fee back. But before you cancel and close that account, consider downgrading it instead for the reasons above.
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