Many credit cards offer tempting bonuses if you sign up and spend so much on the card in the first few months—some cards offer bonuses of $500 or more in cash or travel credit. But there’s something of a dark side to those offers, as cards with the most generous bonuses have annual fees and high interest rates.
Paying an annual fee makes sense if you spend enough on the card to earn better rewards. But if you don’t use the card enough to make the fee worthwhile—and even if you don’t use the card at all—you’re still on the hook for the annual fee.
Fortunately, there is a way to get rid of the annual fee, and you can do it without hurting your credit score.
What’s Ahead:
The problem with annual fees
A single credit card with an annual fee of $50 or $100 may not be a problem. But if you’ve got ten cards with an average annual fee of $75, you’re looking at $750 per year in total fees. That’s a ridiculously high expense to maintain if most or all of the cards are either sitting completely unused in a drawer, or seldom used in your wallet.
This is not an unusual situation either, particularly by people who have excellent credit ratings. The cards are usually accumulated because they offer certain—usually temporary—benefits.
Once in place, the user is reluctant to cancel them due to the potential for a negative impact on their credit score from doing so.
When to downgrade a card with an annual fee
There are various rewards credit cards that offer enhanced rewards during the first several months or year of use. Such cards can have the potential to save you hundreds or even thousands of dollars in that introductory phase. With such generous savings, the longer term impact of high annual fees or even high interest rates may seem unimportant at the time.
An example is a travel rewards cards. If you are in a time in your life where you are doing a lot of traveling, for business or personal reasons, such cards make abundant sense.
If you got this type of card way back when, when you were doing a lot of traveling—but you aren’t anymore—you’re on the hook for an annual fee for a card that’s not paying off. It’s time to downgrade.
Why canceling the card isn’t your best option
One of the major reasons why people with excellent credit tend to accumulate a large number of credit cards, ironically, is the effort to maintain their excellent FICO scores.
It’s all about the credit utilization ratio. This is the amount of outstanding credit card debt that you owe divided by total open lines of credit. For example, if you have five credit cards, with total credit available of $30,000, and you owe $7,500 on those lines, your credit utilization ratio is 25 percent ($7,500 divided by $30,000).
For credit scoring purposes, your credit utilization ratio is optimized at 30 percent or less. As the ratio exceeds 30 percent, it begins to have a negative impact on your credit score. As it approaches 100 percent, it can seriously do a number on your credit score, since it is considered to be a major predictor of default.
As a result of the implications of your credit utilization ratio, you are constantly advised not to close out credit cards. The biggest reason for this advice is that when you close out a credit card, your available credit drops. That means that your credit utilization will automatically increase.
Going back to our example above: If you cancel a credit card with a credit limit of $10,000, your total credit available will drop to $20,000. The $7,500 that you owe will mean that your credit utilization ratio will increase to 37.5 percent. At that point it will begin having a negative impact on your credit score. So once you have a credit card, you have to keep it active, if only for the sake of your credit score.
How to get rid of high-fee cards and keep your credit intact
Fortunately, there is a workaround that will enable you to terminate high-fee credit cards without hurting your credit score. You can often turn a high annual fee credit card into a no annual fee credit card with the same bank. This will enable you to maintain a similar-sized credit line—for credit utilization purposes—without incurring a large annual fee.
For example, let’s say that you have a credit card but don’t like its annual fee.
Rather than cancel the card altogether, you should call up the credit card company customer service and ask them to downgrade your card to a fee-free card. If handled correctly, the issuer should be able to treat this transaction as an “in-program” type change rather than an entirely new account.
During such a downgrade, you typically maintain your existing credit line but drop the annual fee. Your APR and other terms may or may not change.
Examples of in-program downgrades include:
- Downgrading from the Amex Everyday Preferred Card ($95 annual fee) to the Amex Everday card ($0 annual fee)
- Downgrading from an American Express Platium Card ($450 annual fee) to the Preferred Rewards Gold Card ($195 annual fee)
When is a credit card downgrade not possible?
Your ability to downgrade your credit card with an annual fee will vary by bank.
While most issuers would rather keep you as a customer on a no-annual fee card than lose you completely, not all issuers will let you transfer your account to any other card in their portfolio. The only way to know for sure is to call and ask.
Summary
Only you can know when certain rewards cards are no longer benefiting you. When they are not, it’s time to get rid of them. But by transferring your card to a zero annual fee card with the same bank, you can keep your excellent credit standing.
Have you accumulated a few too many credit cards over the years that are no longer serving any useful purpose?
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