Should I Cancel a Credit Card With an Annual Fee?

Should I Cancel a Credit Card With an Annual Fee? article image.

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When looking for a new credit card, most people want a card that doesn't have an annual fee. However, rewards seekers know the best rewards cards often have an annual fee—and sometimes it's worth paying to keep your card open.

When it comes time to decide whether to close or keep a credit card with an annual fee, it may not be an easy call. It can depend on how you use your card, the alternative options available, the benefits the card offers and the annual fee amount.

Here's what you should know and consider before making your decision.

How a Credit Card Annual Fee Works

If your credit card has an annual fee, you'll generally have to pay the fee when you first open your account and each year on the anniversary of your account opening.

It's important to remember that the annual fee immediately gets added to your account's balance. Even if you don't use your card for purchases, make sure you pay your bill on time to avoid getting charged a late payment fee as well.

Sometimes, card issuers will waive the annual fee for the first year, which can make it easier to sign up and try out the card. However, you'll still need to decide if you want to keep or cancel the card when your account anniversary comes around.

Generally, a credit card that has an annual fee will offer better rewards on purchases and cardholder perks than a card that doesn't have an annual fee. The cards with the highest fees are premium credit cards, which may come with luxurious perks, such as access to airport lounges and status in hotel or airline loyalty programs.

Some secured credit cards also have fees, as applicants generally have no or poor credit and fewer options when choosing a card. However, that's not always true, and some of the best secured cards don't have an annual fee.

When It Makes Sense to Keep a Card With an Annual Fee

There's generally only one reason to pay a credit card's annual fee: The benefits you receive outweigh it.

When you have a cash back credit card, pulling out a calculator can help. Look at your account records to determine how much cash back you earned during the past year and compare this against the card's annual fee.

The card might be worth keeping if you earned more cash back than you spent on the fee. But you should also calculate how much you'd earn with a cash back card that doesn't have an annual fee. It may make sense to switch to a card that has a less generous rewards rate but no fee.

With other types of rewards cards, and cards with cardholder benefits like airport lounge access, the calculation isn't so straightforward. Consider how often you use these perks and whether they're worth the cost—maybe shift your perspective and estimate the cost per use and see if that changes your mind.

Another thing to consider is whether you'll lose your rewards if you close an account. With co-branded cards, you'll keep the points or miles you earn in the partner's loyalty program. Closing your cash back card or one that allows you to earn rewards in the issuer's program might erase your rewards.

Read the program's terms, as you may be able to transfer points to a different card or receive a grace period during which you can redeem the rewards after closing your account.

When You Might Want to Cancel the Card

Paying the annual fee generally isn't worth it if:

  • The rewards you earn don't cover the annual fee.
  • You don't use the cardholder benefits.
  • The card's program or rules have changed, and the card isn't valuable to you anymore.
  • When a different card offers the same, or better, rewards for a lower fee.

If you're considering closing your card, perhaps because you rarely use it, you could call the card issuer and ask if there are any retention offers. Sometimes, you can get the fee waived, a statement credit that offsets the fee, additional rewards or another type of offer if you pay the fee and keep your card open.

Some card issuers also let you keep your account open and "downgrade" or "product change" to a different credit card that doesn't have an annual fee. Doing so could be a good option if you might otherwise lose rewards, or if you want to keep the account open for credit scoring purposes.

How Canceling a Credit Card Affects Your Credit

Closing a credit card can immediately affect your credit scores, and may impact them again down the road.

When you close your credit card, your available revolving credit will decrease and your utilization rate may increase—which could hurt your credit scores. If you have other credit cards, you may be able to offset the impact by paying down their balances or using them for fewer purchases.

There's also a trick if you want to keep using your credit cards but maintain a low utilization rate. If you pay down a card's balance before its statement period ends, that could decrease the balance that's reported to the credit bureaus and winds up on your credit reports.

Closing a credit card can also impact your credit scores when the account falls off your credit reports, which will be 10 years later if your account was in good standing when you closed it. When this happens, the average age of accounts in your credit history may decrease, which could hurt your scores.

How to Cancel a Credit Card the Right Way

If you think closing your credit card is the best option, here are a few things you could consider and do first:

  • Ask the card issuer for a retention offer.
  • See if you can downgrade to a card without an annual fee and keep your account open.
  • Figure out what will happen to the rewards in your account.
  • Make sure you pay your balance in full before closing your account.
  • Determine whether your credit utilization rate will increase and have a plan for keeping it low.

Even if the card issuer already charged you the annual fee, it might not be too late. Some card issuers will refund your fee if you close your accounts and it's been fewer than 30 or 60 days. It's best to make your decision early and avoid the potential charge by closing your account before the annual fee hits.