Lots of popular credit cards charge an annual fee. They usually have more than enough benefits to make the fee worth it, but only if you can use those perks.
If you’re not able to take advantage of your card’s features anymore, or you’re just tired of paying an annual fee, your first thought may be to close it. While you could do this, there’s another option that might work out better for you financially.
Ask for a downgrade
Instead of closing a credit card, contact your card issuer and request a downgrade. The technical term for this is a “product change” — you swap out your current credit card for another one in the card issuer’s lineup. By downgrading, you can switch to a card with a lower annual fee or no fee at all.
Card issuers will normally let you exchange your card for another in the same card family. For example, if you have an expensive United Airlines credit card, you could downgrade it to a United card with no annual fee. Downgrading is especially popular with travel rewards cards, since some of them cost hundreds of dollars per year.
Note that you can’t get a product change across different card families. You couldn’t downgrade a United card to a Chase Freedom card, as those are separate types of cards that earn different rewards. If you’re not sure what your downgrade options are, ask your card issuer.
There are a couple of advantages to downgrading your credit card instead of closing it.
You get to keep the account open
By downgrading your credit card, the account itself stays open. You’ll have a different card, but everything else on the account will stay the same. Most importantly, you’ll have the same credit line as before.
This means you won’t lose any spending power when you downgrade. If your old card had a $5,000 credit limit, so will your new one.
It could help your credit score
In some cases, canceling a credit card can negatively affect your credit score. One of the biggest factors in your credit score is your credit utilization, or the portion of your credit that you use. A lower credit utilization is better for your credit score.
Let’s say you have two credit cards, each with a limit of $10,000. You have a balance of $5,000 on one of them. Because you have a $5,000 balance and $20,000 in total credit limits, your credit utilization is 25%. That’s in the recommended range (keeping it under 30% is a popular rule of thumb).
But then you decide to close the card that doesn’t have a balance. Now you have a $5,000 balance and $10,000 in total credit. Your credit utilization jumps to 50%, which would hurt your credit score. If you had downgraded your card instead, this wouldn’t have happened.
You won’t need to worry about this if you always pay your credit cards in full. But if you carry balances on any of them, it’s probably better to downgrade instead of closing a card.
What to know before you downgrade
Keep in mind that a downgrade is a request you make to your card issuer. It’s not guaranteed to work with every credit card company. Most of the major card issuers allow it, but that doesn’t mean they all do. Your downgrade options will depend on the card issuer and the specific card you have.
You’re also not eligible for a card’s welcome offer when you downgrade to it. Let’s say your new card has a $200 welcome bonus offer. That’s only available when you successfully apply for it and open the card as a new cardholder. It’s not available if you get the card through a product change.
There’s more than one way to avoid the annual fee on a credit card. Closing a card is fine if you’re sure you don’t want it anymore. But downgrading can work just as well, with the added benefit of letting you keep your account and your credit line.
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