As enjoyable as it is to score credit card rewards, paying annual fees doesn't hold the same appeal. In some cases, the benefits you get from the card outweigh what you're paying. But if you've signed up for multiple cards to maximize your rewards, you could be shelling out hundreds every year in fees.
While your natural impulse may be to cancel a card, that often brings down your credit score. The better solution is to contact your card issuer for a downgrade.
The advantage of downgrading over canceling
The biggest reason to downgrade your card is that there's no way it can hurt your credit score. Your new card will have the same credit limit and retain the account history you've already built; the only changes will be the features and reward rate. Since you're downgrading, your new card likely won't have as many perks or earn as much cash back as your previous card did.
When you cancel a card, it can increase your credit utilization and reduce your average account age -- both of which will ding your credit score.
Your credit utilization accounts for 30% of your credit score, and it's the sum of all your card balances divided by your available credit across those cards. When you cancel a card, your available credit goes down, and your credit utilization goes up.
Account history is responsible for 15% of your score. If you've had the card you're canceling for a long time, then the cancellation could decrease the average age of your credit accounts.
CreditCards.com says the effect of a cancellation on your score depends heavily on your specific situation. It could drop you into a lower credit score range, or it could have a negligible effect. Still, considering that there's no risk when you downgrade, it makes sense to go that route instead.
How to downgrade your credit card
First things first: If you've had this card less than a year, you may need to wait to downgrade it. Chase, in particular, is known for denying downgrade requests within the first account year. But even for downgrades after the one-year mark, card issuers often refund annual fees paid in the last 30 to 60 days.
Before you downgrade, make sure you redeem or transfer any rewards you have on the card, as you could lose them if you don't. You'll also need to choose the card you want to switch to, and there are a few standard restrictions card issuers place on that. You can't go from a personal credit card to a business credit card, or vice versa. For all you American Express cardholders, swapping charge cards with credit cards also isn't an option.
You can only downgrade to a card in the same product line. For example, if you have a Chase United card, you can switch to another Chase United card, but not to a Chase Sapphire card or a Chase Marriott card.
Once you're ready to downgrade, either call your card issuer or send a message through your online account. Some card issuers require that you call. Let them know you want to downgrade one of your cards (the technical term is "product change"), and then provide the name of the new card you want.
Downgrading your card isn't foolproof. It's done at the card issuer's discretion, and they could say no, leaving you back at square one. Excessive downgrading can also make it look like you're gaming the system, in which case the card issuer may:
- Deny any future credit card applications.
- Take away your sign-up bonus.
- Cancel the card and possibly any other cards you have with them.
Amex even updated its terms and conditions in 2017 specifically to crack down on people who apply for cards, get the signup bonuses, and then downgrade or cancel to avoid any fees.
Now, don't let this scare you off downgrading entirely. Just be smart about it. Keep at least one card for the long haul, and avoid downgrading card after card at the one-year mark.
No one wants to pay too much for their credit cards. If you decide that a card isn't worth its fee anymore, see if you can downgrade instead of canceling.