If you find yourself paying a high annual fee on a credit card you rarely use, you may wonder if it’s time to cancel the card. The answer is usually no, for reasons we’ll discuss in a moment. What you may want to do is give your credit card company a call to learn if you can downgrade to a less expensive card instead. Before picking up the phone, though, here are five things you should do.
1. Take one last spin through the list of perks
Let’s say you have The Platinum Card® from American Express. Even though you’re paying $695 annually to carry the card (see rates and fees), doing so made sense for a few years due to the amount of time you spent traveling and the number of perks you took advantage of. However, you’ve changed jobs, no longer travel as often, and don’t have another trip planned for the foreseeable future. In short, you no longer believe you’re able to offset the annual fee by taking advantage of the perks offered by the card.
Before you request a downgrade to another American Express card, take one last look at the perks the company offers to Amex Platinum Card holders. It’s possible there are new benefits available, or you’ve forgotten about perks that still save you money, like the free Walmart+ membership and the $240 digital entertainment credit (terms apply, enrollment may be required).
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In short, make sure you’re actually ready to give the card up before calling the company.
2. Get an update on your credit score
If you’re not quite sure where your credit score stands these days, it’s a good idea to find out before you request a downgrade. While you’ll probably be fine, if your score has dropped since you first applied for the credit card, it’s possible the company won’t approve a downgrade.
It’s the sort of information you want to know before calling.
3. Look for another card with the same company
Go to the credit card company’s website to learn more about its other credit cards. Each offers different benefits and carries a different annual fee (if there is a fee at all). Review the perks associated with each card and determine which one you’re likely to benefit from most. Once you’ve done a credit card comparison, you’re nearly ready to give the credit card company a call.
4. You may have to use up your rewards points
Even though you’re downgrading to a card with the same company, it’s possible you’ll lose all or part of your rewards points when the credit card is downgraded. That said, the same is not true for all credit card companies, so be sure to find out before deciding whether you need to spend the points you’ve accumulated.
5. Transfer any bills routinely charged to the card to another credit card
If you use the credit card to pay any bills — including subscriptions and occasional expenses like insurance premiums — make sure to change the payment method right away. The last thing you want is a note from a creditor saying your form of payment didn’t work — and possibly a late fee.
Why you shouldn’t cancel a card outright
Canceling a credit card rather than downgrading can lead to a lower credit score. Here are two reasons why.
It changes your credit utilization ratio
Closing a credit card reduces the amount of credit you have available. For example, if you have three credit cards, each with a credit limit of $5,000, you have a total of $15,000 available. Now, say you use one of the cards to charge a $5,000 hot tub purchase. That means you’re using 33% of your available credit ($5,000 ÷ $15,000 = 0.33).
Look what happens if you cancel one of the cards and are left with $10,000 in available credit. If you were to buy the same hot tub, your credit utilization ratio would jump to 50% ($5,000 ÷ $10,000 = 0.50).
Creditors like to see that you have plenty of credit available, but manage to keep your credit ratio low. In short, the lower your credit ratio, the better.
It lowers your average age of credit
Creditors like to see applicants with a history of managing credit well. The longer you’ve had credit cards, paid your bills on time, and didn’t max out your credit limit, the higher your credit score is likely to be. Canceling a card lowers the overall average age of your credit.
There’s nothing wrong with downgrading a card if it no longer benefits you. Before you do, though, make sure you’re ready for the change.
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