Thinking About Canceling a Credit Card with an Annual Fee? Do This Instead

Credit cards with annual fees can be worth it, especially if the value of their benefits surpass their costs. But they can be expensive. And if you're trying to reduce your expenses, credit cards with annual fees are a luxury that can be cut.

Your trigger reaction might be to cancel the card outright. After all, that will close the account and eliminate the fee. However, canceling a credit card can have negative consequences, like lowering the average age on your credit cards, thus hurting your credit score. It can also mean forfeiting rewards if you close the account before they're used.

Thankfully, you don't have to cancel a credit card to eliminate the fee. There's another method that could be just as effective without damaging your credit and potentially keeping your credit card rewards. You just have to downgrade the credit card to a no-fee version.

How downgrading your credit card works

Downgrading a credit card involves swapping your current card for a no-fee alternative from the same card issuer and within the same lineup of cards.

For instance, let's say you have the Chase Sapphire Reserve®. Not gonna lie, this card is pretty awesome: a $300 annual travel credit, up to 10x total points per $1 spent on hotels and car rentals through Chase Travel℠ immediately after the first $300 is spent on travel purchases annually, and Global Entry/TSA PreCheck reimbursement (terms apply). But those perks come at a hefty price -- $550 (see rates and fees). That's not exactly budget-friendly.

If you wanted to get out of the Chase Sapphire Reserve®, you could downgrade it to another no-fee Chase Sapphire card, like the Chase Freedom Flex℠. This card has a $0 annual fee, but it can earn up to 5% cash back on up to $1,500 in combined purchases in bonus categories each quarter you activate (terms apply, see rates and fees).

That said, credit card companies may impose limits on which cards are eligible for a downgrade. For example, while Chase may let you trade your Chase Sapphire Reserve® for the Chase Freedom Flex℠, you might have a hard time downgrading it for, say, the Prime Visa. All three are Chase credit cards, but whereas Chase Freedom Flex℠ and Chase Sapphire Reserve® fall within the same product line of cash back credit cards, the Amazon-cobranded Prime Visa card does not.

The pros and cons of downgrading your credit card

The biggest advantage of downgrading a card is that you get to keep your credit card account open. Even though you'll have a different no-fee card, your credit card company will treat the account as if it were the same. This helps you avoid shortening the length of your credit history, which is one of the factors used to calculate your credit score. It might also help you avoid increasing your credit utilization by keeping your credit limits the same.

Another benefit: You get a new credit card without having a credit check. Since hard inquiries can temporarily ding your credit score, this is another way of protecting your credit.

On the flip side, this new credit card won't come with a welcome bonus, which is kind of a bummer. You're also sacrificing the perks on your annual fee credit card, like better rewards and travel credits. Depending on your card's issuer, you might even have to give up some rewards to complete the downgrade. For example, American Express is known to rescind bonuses if you close or downgrade a card within 12 months of opening it.

If you don't want to pay an annual fee for your card, however, downgrading is a much better alternative than closing it. Just call your credit card company to see what your downgrade options are and how long the process will take. As long as your downgrade is approved, you should get your new card within a couple of weeks.

And if you do decide to close it, check out our best no fee credit cards to find the best card to replace it.