Should you downgrade your credit card?

If you chose a credit card for its enticing perks but are no longer reaping benefits that make the card worth its annual fee, you may want to cancel your credit card. Unfortunately, your credit score might take a dip after you cancel. Downgrading your card can help you avoid the annual fee and the negative impacts of closing a credit card. Here’s how to do it.

When to downgrade your credit card

The downgrade-or-cancel debate mainly comes into play when you want to stop paying an annual fee. Downgrading isn’t a viable solution if you simply want to cut down the number of accounts you have.

It’s probably time to downgrade if you’re starting to doubt that paying your credit card’s annual fee is worth it. Maybe you’re not using the card enough to out-earn your annual fee, or maybe you don’t use the perks anymore. Or maybe you have multiple cards with high annual fees and want to cut it down to one or two. Whatever your situation, there’s no reason to hold on to a credit card that’s taking away money from you rather than putting it back into your pocket.

Pros of downgrading instead of canceling your credit card

The main perk of downgrading instead of closing a credit card is your credit score. When you cancel your credit card a few things happen:

Doesn’t affect your credit utilization ratio

For one, your credit utilization ratio can increase, which can negatively affect your credit score. Your credit utilization ratio accounts for up to 30 percent of your total credit score and refers to the amount of available credit you are using. This number is aggregated from all lines of credit open in your name. Because of this, if you cancel a credit card, your total credit limit across all cards goes down.

Think of it this way: Let’s say you have three credit cards (card A, B and C) with three different balances.

In this scenario, your credit utilization ratio would be 30 percent because of your total available credit ($20,000) you are using $6,000.

Now, let’s say you cancel credit card B because it has a high annual fee, but keep your other remaining cards open and spend as normal.

By just spending an additional $1,000 in a month across two cards instead of three, your credit utilization ratio would increase to 36.67 percent.

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Doesn’t affect your average age of accounts

Another reason downgrading can save your credit score is because it shouldn’t affect your average account age, which makes up 15 percent of your credit score. If you cancel an older credit card, your average account age decreases and negatively impacts your credit score. When you downgrade, you keep the same account, and that element of your credit report is unchanged.

No need to apply for a new card

If you plan to apply for a new credit card after you cancel your current card, your credit will take another hit due to the hard inquiry that comes with a credit card application. If you downgrade instead of canceling, you bypass the inquiry and get a new card. Plus, you don’t have to go through the application process.

Cons of downgrading your credit card

In some situations, it may make sense to cancel your card instead. Here are some pitfalls of downgrading to watch out for:

Limited to one issuer and product line

Of course, you can’t downgrade a Chase card to an American Express card. You’re bound by what your current issuer offers, and you probably can’t downgrade to any card you’d like. For example, if you have the Capital One Savor Cash Rewards Credit Card* and want to downgrade, you would have to do so within the Savor product line. In this case, the card you could ask to downgrade to would be the Capital One SavorOne Cash Rewards Credit Card. The only way to know your options for sure is to call and ask.

Potential rewards loss

Downgrading your card might mean you lose any unredeemed points or cash back, so check your rewards balance before doing so. Unredeemed cash back is easy enough to take care of — simply redeem it. Points can be tougher to get rid of since you might not have a flight planned at the time you’re considering downgrading. First, ask your issuer if your points will disappear once you downgrade — you may be able to hang onto them. If not, your next best option after a travel redemption would be cashing in for a gift card, even though that doesn’t always offer the best per-point value.

No sign-up bonus

The fact that you keep the same account when you downgrade a credit card is a positive in some ways, but it’s also limiting. When you downgrade (or upgrade), you aren’t typically eligible for the new card’s sign-up bonus. The best credit card sign-up bonuses are worth hundreds of dollars, which is significant. If you don’t mind the associated credit hits and are set on earning that sign-up bonus, you may be better off canceling your current card and applying for the new card.

How to downgrade your credit card

It’s important to note you have to request a downgrade and have it approved by a credit card issuer. In essence, immediate approval for a downgrade is not always a guarantee. To optimize your chances of having your downgrade request approved, follow the steps below.

1. Know how long you have had the account open. Some issuers don’t approve downgrade requests on accounts that have been open less than a year. That said, you can always present your case. If you’re unable to pay a high annual fee associated with your credit card, now is the time to reach out to your issuer to see if they can work with you.
2. Redeem rewards. As mentioned, you will probably lose any unredeemed rewards, so make sure to cash in before you initiate the downgrade.
3. Call your credit card company. The next step is to reach out to your issuer to formally make the request. The process of getting your downgrade approved depends on the issuer, and some may require you call them while others will let you make the request online.

Your issuer will tell you which cards you can downgrade to (if any), and you can make your decision from there. If you’re not sure, you don’t have to make a decision on the spot. Feel free to think it over and call back another day.

The bottom line

Lifestyle changes may make a once useful financial tool a burden, especially if a high annual fee is in the mix. If this applies to you, take comfort in knowing there are options available that don’t have to hurt your credit score. Now is the time to reach out to your credit card issuer to explain your financial situation and ask for assistance, including options to downgrade your card.

*The information about the Capital One Savor Cash Rewards Credit Card has been collected independently by Bankrate.com. The card details have not been reviewed or approved by the card issuer.