KEY POINTS
- To steer clear of an annual fee, get in touch with your credit card issuer to inquire about the possibility of switching to a lower-tier credit card.
- Reducing the account status does not result in closure.
- You will receive a new card with an equivalent credit limit to the previous one.
Lots of commonly used credit cards An annual fee is typically required. The benefits offered by these memberships usually justify the cost, as long as you are able to utilize the advantages.
If you find that you are no longer able to make use of the benefits offered by your card, or if you are simply weary of paying an annual fee, your initial inclination might be to cancel it. However, there is an alternative choice that could potentially be more beneficial for you in terms of finances.
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Request a lower level or status.
Instead of cancelling a credit card, you can reach out to your card provider and ask for a downgrade. This process, known as a “product change,” involves exchanging your existing credit card for a different one offered by the same provider. By downgrading, you have the option to switch to a card with a reduced annual fee or without any fee.
Credit card companies typically allow customers to switch their credit card to another one within the same card network. For instance, if you own a premium United Airlines credit card, you may choose to downgrade it to a United card that does not have an annual fee. This practice of downgrading is commonly favored by cardholders. credit cards that offer benefits and rewards for spending on travel , as a few of them have an annual price tag of hundreds of dollars.
Please be aware that it is not possible to switch a product between different card types. For example, you cannot change a United card to a Chase Freedom card, as these belong to separate card families with distinct reward programs. If you are unsure about the options available for downgrading your card, it is recommended to inquire with your card issuer.
There are a few benefits to switching to a lower-tier credit card rather than shutting it down.
You have the option to maintain the account.
When you switch to a lower-tier credit card, your account remains active. Although you will receive a new card, all other aspects of the account will remain unchanged. It is crucial to note that your credit limit will remain the same as it was previously.
This indicates that you will not experience a decrease in your purchasing ability when you switch to a lower-tier card. If your previous card had a credit limit of $5,000, your new card will also have the same limit.
It has the potential to improve your credit rating.
Closing a credit card account can have a detrimental impact on your credit score in certain situations. Your credit utilization, which refers to the amount of credit you are using compared to the total available credit, is a significant determinant of your credit score. It is generally advised to maintain a lower credit utilization to benefit your credit score.
Suppose you possess two credit cards, both having a $10,000 limit. One of the cards has a $5,000 balance. With a total credit limit of $20,000 and a $5,000 balance, your credit utilization stands at 25%, falling within the advised range (staying below 30% is commonly recommended).
However, when you chose to close the card with no balance, you are left with a $5,000 balance and a total credit limit of $10,000. This results in a credit utilization ratio of 50%, which could negatively impact your credit score. If you had opted to downgrade the card instead, this situation could have been avoided.
If you consistently pay off your credit card bills in full, you won’t have to be concerned about this issue. However, if you have outstanding balances on any of your cards, it is advisable to consider downgrading the card rather than closing it.
Things to consider before you downgrade
Please remember that a downgrade is a formal request made to your credit card issuer and there is no assurance that it will be accepted by all credit card companies. While many prominent card issuers do permit downgrades, it is not a universal practice. The downgrade choices available to you will vary based on the card issuer and the particular credit card you hold.
You will not qualify for a credit card’s introductory offer if you choose to switch to a lower-tier card. Suppose your new card comes with a $200 welcome bonus incentive. This offer can only be claimed by individuals who apply for the card and become new cardholders. If you receive the card through a product switch, you will not be eligible for the welcome bonus.
There are multiple strategies to prevent paying the yearly fee on a credit card. Terminating a card is acceptable if you are certain you no longer need it. However, switching to a lower-tier card can be equally effective, while also allowing you to retain your account and credit limit.
