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With the coronavirus pandemic still wreaking havoc on the nation’s economy, many people are making the wise decision to reduce their household expenses. Credit card annual fees are an obvious place to look at for cuts, especially if you have one or more expensive premium cards with travel perks that you can’t currently utilize.
But hold on! Closing your credit card to avoid an annual fee is a little like deciding to reduce your manicure costs by cutting off your fingers. There are many less drastic measures you can take in order to reduce how much you’re paying for your cards.
“Keeping a credit card open, even if you don’t use it, helps build credit,” explained Jill Gonzalez, an analyst at the personal finance website WalletHub. “You could honestly cut it up and keep it in a drawer, and it would still be better than closing it.”
In fact, there are a number of reasons not to close any of your cards outright right now, even if you have a lot of them. Let’s dive into why you should try to avoid canceling your credit cards at this moment in time, and how can you still keep a card without paying an annual fee for it.
Access to credit during a recession can be a lifeline
During an economic downturn, banks and credit card issuers typically tighten up on how much debt they’re willing to carry and how much credit they’re extending, instead looking to hoard cash to ride out the storm. That means it’s harder to get approved for new credit during a recession, which means any credit you already have available to you becomes more valuable.
Therefore, the last thing you want to do is voluntarily give up credit that you can already access if you need to. You’re only making your life harder by reducing your options, especially if you’re recently lost income from getting laid off or having your hours reduced.
“A credit card can be a helpful standby line of credit,” explained Lynnette Khalfani-Cox, the CEO and co-founder of Ask The Money Coach and author of Zero Debt: The Ultimate Guide to Financial Freedom. “I would recommend people keep cards open under the current circumstances. We just don’t know how long these tough times are going to last.”
And with so many unknowns still ahead of us — will sections of the country have to lock down again? Will the federal addition to unemployment be extended beyond July? — even if you’re currently in decent financial shape, you don’t know what your situation might look like three or six months from now. At some point, having ready access to credit might be the difference between being able to get groceries or going without.
Yes, in an ideal world, you don’t want to carry a balance on your credit cards. The interest rates are exorbitant, and the minimum payments are so low that if you don’t make a plan in advance to pay off your debt, you could end up stuck in debt for years on end.
But there are ways to intelligently use credit card debt in an emergency to make sure your basics are covered, and still have a way out at the end. However, you can only use this emergency lifeline if you have it, and closing your credit cards eliminates even the possibility of being able to temporarily finance your expenses when you don’t have any other options.
Closing a credit card may hurt your credit score
In our series on “Myths About Credit,” we’ve explained that while the action of closing a credit card itself doesn’t affect your credit score, the loss of an open credit line very well might.
“When people close a credit card, they’re under the mistaken impression that it will somehow increase their credit score,” said Khalfani-Cox. “Typically, what happens more often is there’s a negative impact on their score.”
That’s because of a concept known as the “credit utilization ratio,” which makes up a significant part of most credit scores — as much as 30% in some scoring models. Your credit utilization is calculated by adding up all of the debt you owe across all your credit cards, and then dividing that amount by the total of all of your credit limits.
Using an example provided by Khalfani-Cox, assume a person has two credit cards. Each card has a $5,000 limit for a total of $10,000 in credit, and the person has charged $2,500 on each card for a total of $5,000 in debt, so they have a 50% credit utilization overall (because 10,000 divided by 20,000 is 0.5 or 50%).
Our hypothetical person decides to try to get a handle on his or her debt by getting a new credit card with an introductory balance transfer offer. They’re approved for the new card, which also has a $5,000 credit limit, and transfer both existing balances to it.
At this point, they’re in better shape than they were — they still have $5,000 in credit card debt, but now they have $15,000 in open credit lines, which means their utilization ratio has actually dropped to 33%. Credit scoring models ideally like to see utilization ratios of no more than 30%, so if you’re at a 33% ratio, you’re in slightly tenuous but not awful shape.
But if you then close those two old unused credit cards, you’ve made things worse, because you increased your utilization ratio to 100% by eliminating $10,000 in credit lines, leaving only $5,000 in credit as a result (which is now also completely consumed with debt).
Even though you haven’t changed how much you actually owe, you look worse to a lender as a result, explained Khalfani-Cox. “Being maxed out statistically signifies more risk to lenders,” she said.
If you don’t have any credit card debt, or you have a huge amount of unused credit, then closing a card and losing a line might not make a major difference. “The impact is going to be much more significant to someone who has 1 or 2 or 3 credit cards, versus someone with 6 or 7 credit cards or more,” said Khalfani-Cox.
But many people don’t have a ton of credit, and some may be carrying debt, so it’s important to keep in mind the effect that closing a card can have on your credit score. Plus, by lowering the ceiling on your available credit, you make it more likely that a sudden need to use your remaining cards will max out all the credit you have left.
There’s a better option than canceling your credit card
Of course, if you’re trying to cut your expenses, getting rid of credit card annual fees is a great idea, especially for cards you aren’t using. But if you already paid the annual fee months ago, closing the card now isn’t going to get that annual fee refunded (though some issuers may give you a prorated refund of the fee when you close a card).
However, if an annual fee recently appeared on your monthly statement, now’s the time to act. You usually have at least 30 days to make a decision on what to do with a card starting from the date the annual fee posts. So how can you keep the card open, but not have to pay the annual fee on it?
Simple. Call your credit card issuer and tell them you don’t want to pay the annual fee anymore.
Yes, it really can be that easy. Because when you make that call, the customer service agent on the other end of the line may be able to offer you one or even two options (and if they don’t, be proactive and ask about them).
First, you may be eligible for what’s known as a retention offer. Credit card issuers generally don’t like losing customers — especially profitable ones — after they’ve already spent money on marketing and sign-up bonuses to acquire them. So sometimes they’ll offer to waive or credit the annual fee for a year.
How common is this? According to WalletHub’s 2019 Credit Card Customer Service Survey, 77% of people who’ve asked a credit card company to improve their account terms or risk losing them as a customer have been successful.
“I would encourage anyone who’s paying an annual fee to simply call up their credit card company and ask for that fee to be waived,” advised Khalfani-Cox. “Many times credit card companies will do it because they don’t want to lose you as a customer.”
Retention offers can also come in the form of bonus rewards, where the annual fee isn’t waived but the issuer gives you extra points or miles for remaining a card holder. Under normal circumstances, these offers can make sense, but if you’re trying to cut down on your annual fees, extra travel points won’t help you.
But even if you aren’t eligible for a retention offer, there’s still another option, which the phone agent may volunteer on their own (again, ask if they don’t). In many cases, you can convert your existing credit card with an annual fee to a different card from the same bank, but one that doesn’t have an annual fee.
Converting a card gives you a major advantage over closing it — you’re keeping all your credit lines open, but dropping the annual fee entirely. It’s a flat-out win-win.
Believe it or not, this is an option that’s available for many credit cards, even high-end ones like the popular Chase Sapphire Reserve. If you’re not ready to pay $550 to renew your Sapphire Reserve for another year — or even the reduced $450 annual fee Chase is currently offering existing Sapphire Reserve card holders — call and ask to be converted to the much-cheaper Chase Sapphire Preferred Card, which only has a $95 annual fee.
Still too expensive? You can likely go even further and convert your Sapphire Reserve to a Chase Freedom Unlimited with no annual fee. Of course, a Freedom Unlimited card isn’t going to have a fancy $300 annual travel credit or earn at 3 points per dollar on travel and dining, but it’ll keep your credit line open, and you’ll even earn 1.5% cash back on everything you buy with it.
Is there a catch to converting a card instead of closing it?
There are two downsides to converting a credit card rather than canceling the account, but frankly, both are relatively trivial given the current economic climate. One is that if you’re converting from a card with an annual fee to one without, you’re almost certainly giving up some of the better benefits of your old card, especially if it had a high annual fee.
A no-annual-fee card isn’t going to come with perks like airport lounge access or food delivery credits (though neither will a closed account, so there’s no loss if that’s your other option). A card with no annual fee also probably doesn’t earn the same rewards on your purchases. In some cases, the new card might not earn any rewards at all.
But the goal right now isn’t to earn fantastic rewards or have access to perks you can’t even use. It’s to maintain all your credit lines in case you need them. And it’s also possible you could end up better off if the new card is more aligned with your current needs than your old one.
“Aside from the obvious benefit of not having to pay an annual fee anymore, another upside of switching to another credit card is the possibility to earn more rewards,” said Gonzalez. “For example, you might be paying a high annual fee for a travel rewards credit card, but now you’re not traveling due to the pandemic. You could be gaining more from a credit card with rewards that better suit your current spending habits.”
The second downside is that if you convert your existing credit card to a new card, it’s not the same as opening a new card from scratch. “Switching credit cards is not considered opening a new account,” explained Gonzalez. “So you won’t be able to benefit from any type of sign-up bonus or introductory 0% APR on the new credit card.”
You also may be ineligible to get a sign-up bonus on that card in the future, and in some cases, you could be temporarily locked out of sign-up bonuses on related cards with that bank for a period of 24-48 months. But again, given where we are right now, that’s a small price to pay for having access to credit when you desperately need it.
Simpler isn’t always better when it comes to credit cards
There will be times that you can’t get the annual fee on your card waived with a retention offer, and there’s also no option to convert it to a cheaper card. In that case, you’ll have to decide if paying the annual fee for another year is worth the cost of keeping that credit line open. It’s a personal decision you should make based on how much the annual fee costs and how large of a hit your credit score is likely to take from closing it.
But even though it may seem like life would be simpler without so many credit cards, you should stop and think things through before just unilaterally canceling your credit cards. In many cases, you’ll be making a smarter choice by working to hang onto that card at a much lower price, and keeping your financial options open down the road.
Having money issues due to the coronavirus pandemic? Read CNN Underscored’s previous stories in this series:
- Income taxes are due — here’s what to do if you can’t pay them
- The worst financial fees and how to avoid them
- 4 steps to getting rid of your credit card debt
- Is it time to withdraw money or borrow from your 401(k) piggy bank?
- How to avoid fees when using your stimulus payment debit card
- Hate budgeting? Make a spending plan instead. (Yes, there’s a difference)
- If you need to go into debt, keep these three rules in mind
- Follow these 10 steps to file for — and keep — your unemployment benefits
- Lost your job? Take 30 minutes to reduce these three major household expenses
Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.
Note: The prices above reflect the retailer’s listed price at the time of publication. While the offers mentioned above are accurate at the time of publication, they’re subject to change at any time and may have changed, or may no longer be available.