You look down at the credit card in your hand. It’s one of your older cards, and you’ve bought plenty with it. The problem is, it charges an annual fee, and you’re sick of paying it. You’re tempted to cancel the card to eliminate the fee altogether. But you know doing so will hurt your credit score.
Should you cancel your card? Or should you continue paying that annual fee when you could easily find another credit card that provides a generous rewards program without any annual charges? (See also: 8 Fees You Need to Stop Paying Right Now)
Why you shouldn’t cancel your card
It can be tempting to cancel any credit card that charges an annual fee, especially if that fee is a big one. But canceling a credit card can hurt your credit utilization ratio. This ratio measures how much of your available credit you are using at any one time. The more credit you use, the more your credit score will drop.
When you close a credit card, your credit utilization ratio will automatically increase, even if you don’t make any new purchases. Say you have three credit cards with a total of $15,000 of available credit. You are using $5,000 of that $15,000 in available credit. If you close one of those three cards — the card with a credit limit of $3,000 — you’re left with a total credit line of $12,000 rather than $15,000, ultimately increasing your credit utilization ratio. This is why financial experts recommend keeping credit card accounts open even if you aren’t using them.
The age of your credit matters, too. The older your credit, the better it is for your score. So if you close an older card, even if it does charge an annual fee you’d rather not pay, you will also hurt your credit score.
How to get rid of that annual fee
How, then, can you get rid of that annual fee without damaging your credit score? You’ll have to call your bank and negotiate.
Some banks will agree to downgrade your credit card’s annual fee and move it to another card that doesn’t charge any fees, or at the very least, offers a lower annual fee. Doing so won’t hurt your credit score because you’ll maintain your existing credit limit and you won’t be closing an older credit card.
Why would a bank approve such a downgrade? Mainly because it doesn’t want to lose you as a customer. If you tell customer service that you are considering canceling the card if the annual fee doesn’t go away, many credit card providers will agree to a downgrade. They’ll earn more money from your continued business than they would have from that annual fee.
It helps, of course, if you always make your payments on time. Your provider will be more interested in retaining your business, too, if you actually use your card on a regular basis. If you haven’t made a purchase on your card in months, your provider might be less likely to approve your request for a downgrade.
When you downgrade to a card with no annual fee, you will lose out on perks the original card offered. Your new rewards program won’t be as strong. Your new card might not have a rewards program at all. If that’s worth dumping the annual fee, though, downgrading your credit card might still be the smart financial move. (See also: How to Decide if an Annual Fee Credit Card Is Worth It for You)