When you have a credit card with an annual fee, you have a couple options to consider if you barely use it: cancel the card outright, or downgrade to a lower-tiered card. Since credit cards can be debt traps, you might think that cancelling the card is the best option, and that’s certainly a good reason to do it…but you should first consider downgrading to a lesser card first.
You want to keep your credit score high
The problem with cancelling your existing card is that it might hurt your credit score. That’s because the more credit you have, the better it is for your credit utilization ratio — a measure of how much debt you don’t use. Since it’s a good indicator that you’re a disciplined borrower, it accounts for up to 30% of your credit score. For that reason, if you plan to apply for a big loan in the next few months, it might be a better option to keep your credit score intact by downgrading your existing card rather than cancelling it.
Another factor to consider is the age of your existing credit card: the longer you have it, the better it is, as credit history accounts for 15% of your total credit score. By downgrading, you would essentially transfer over the history of your credit card to a new piece of plastic, while saving money on the annual fee.
You can preserve existing rewards
It’s possible that you’ve already banked up some rewards points with your existing card. Rather than cancelling your card, you might be better off downgrading your card to keep the rewards, especially if the downgrade doesn’t include an annual fee.
You can pivot to a card that better meets your needs
Some cards allow you to downgrade to cash back tiers or rewards categories that might be slightly different — and more suitable — for your current spending habits. When considering a downgrade, take a close look at the statement credits offered for each card, as they vary in what they offer.
While there are downsides to downgrading cards (you won’t qualify for a sign-up bonus, benefits will be reduced), it can still be a better option than cancelling the card completely. The only catch is that most lenders won’t let you downgrade for about a year after having the card. But that should give you time to gauge your usage and evaluate other options, whether that’s a new card altogether or downgrading to a lower-tiered card.