A high credit card annual fee is one thing if you can take full advantage of the rewards and benefits the card offers. But if you’re unable to — such as is the case during the pandemic — this money could be better spent elsewhere. You may wonder if you should downgrade your credit card so you don’t have to pay a high annual fee.
You might feel the urge to close your account if the annual fee is higher than you would like. However, doing so could hurt your credit score, which is why downgrading is the smarter choice. So before making a move, make sure you understand everything you need to know about downgrading your credit card.
What Happens When You Downgrade Your Credit Card?
When you downgrade your credit card, you change to a card provided by the same company under the same portfolio with a more affordable or zero annual fee but fewer perks and rewards.
“Most card issuers have other cards you can choose within the same family of cards,” JD Power vice president of global banking and payments Jim Miller told US News My Money.
With downgrading, your account number and history stay the same. Typically, the card provider will conduct a soft credit check, which doesn’t hurt your score. There is no welcome bonus if you downgrade, as those are only for new cardholders.
Before you downgrade, make sure you know what will happen to any rewards you haven’t used. For example, if you downgrade from a Chase Sapphire Reserve to Chase Sapphire Preferred, you’ll keep your points but will have a lower rewards rate moving forward, according to Miller.
Not every card lets you downgrade. When this happens, call your card provider to work out a cheaper annual fee or close the account.
When Should You Downgrade Your Credit Card?
There are several reasons why you would want to downgrade your credit card, such as:
- You don’t use your rewards anymore
- The annual fee outweighs the benefits
- The yearly fee exceeds your budget
- You have multiple credit cards with expensive annual fees and can’t afford all of them
Frank Fantozzi, Planned Financial Services founder and president, says, “First, look at your spending habits and the type of rewards you’re getting from the card to see if they align with your usage.”
Downgrading is wise if the annual fee is more than the benefits and rewards. Additionally, you can only downgrade a credit card if you’ve had it for 12 or more months.
“There can be some restrictions, so check the terms,” Stephen Newland, an accredited financial counselor and owner of Find Your Money Path.
You’re more likely to meet the downgrade requirements if you pay off your balance and have a good relationship with the credit card provider.
Should You Downgrade Or Cancel Your Credit Card?
Fantozzi warns against canceling your credit card because it can raise your credit utilization ratio, which is one of the most significant factors in your credit score. Credit utilization is the amount of credit you’ve used out of the amount you have available. When you close an account, it lowers your amount of available credit, which hurts your score.
“Credit utilization accounts for 30% of your credit score,” Fantozzi told US News My Money. “If you downgrade, you don’t impact credit utilization and you keep the same account history status.”
Conversely, closing your account impacts each of these financial variables. The extent hinges on the number of credit cards you have and your amount of unused credit. If you have multiple cards and a lot of available credit, canceling your card might have a smaller effect.
“I personally canceled two airline cards since COVID-19 to avoid paying the annual fees, which really weren’t worth it,” Miller explains. “I have plenty of cards, so it was not worth holding on to them, and it didn’t make enough of a difference in my credit score.”
However, if you have just a few cards in your wallet, closing one could have a greater negative impact. If you’re worried about hurting your credit or meeting the downgrade criteria, contact your card provider to ask about a lower annual fee.
“The company has no obligation to say yes, but if you have a history with them and you are struggling, they are going to want to keep you as a customer and might be willing to give you a discount or waive the fee for one year,” Newland says.
How To Downgrade Your Credit Card
Your first move should be contacting customer service to inquire about your options, limitations, and penalties. The responses will help you figure out whether you should continue with the downgrade. Before you call, Miller recommends that you assess your cards to ensure they fit your needs.
“In general, it’s a good idea for customers to shop around their cards more often than they do,” he explains. “It might make sense to pay a smaller or no annual fee and get fewer air miles or less cash back rewards.”
- Hampshire, Kristen. “When to Downgrade Your Credit Card.” U.S. News & World Report, U.S. News & World Report, 27 Jan. 2021, creditcards.usnews.com/articles/should-you-downgrade-your-credit-card.