Credit cards with rewards programs often offer many perks and benefits. But, some cards require consumers to pay an annual fee to reap the rewards. If you find that the annual fee isn’t worth the value you’re receiving in return or are struggling to pay for it, downgrading your card is a viable option. That said, here’s why you may want to consider downgrading your credit card status rather than canceling it altogether.
WHAT DOES IT MEAN TO DOWNGRADE YOUR CREDIT CARD?
When you downgrade your credit card, your credit card company provides a card with reduced fees and fewer perks. Credit card companies have multiple product lines, and customers generally can switch to a card within the same product line. For example, you might downgrade The Platinum Card® from American Express to the Gold Card to lower your annual fee—but you couldn’t downgrade to an Amex Marriot Bonvoy BevyTM card from a Platinum Card.
However, you typically must have your card open for at least a year before you can downgrade it. And some creditors may have additional guidelines or restrictions in place. So, check with your credit card company to see what their terms and conditions are before proceeding.
WHEN IT MAKES SENSE TO DOWNGRADE YOUR CREDIT CARD
It’s recommended to downgrade your card if the annual fee is too steep or you get a new card that you plan to use as your primary credit card. Because credit cards usually have thresholds for rewards and penalties, paying for your card only makes sense if your usage outweighs the costs. Otherwise, downgrading can help you keep the card without paying for it.
PROS AND CONS OF DOWNGRADING YOUR CREDIT CARD
Consider the following pros and cons if you want to downgrade your credit card.
Pros
- You can lower or eliminate annual fees.
- Downgrading instead of closing the card can keep your credit utilization low and contribute to a high credit score.
- If you’ve had the credit card for several years or more, downgrading can preserve the average age of your account. In other words, the longer you have a line of credit, the more your credit score benefits. Downgrading a card lets you keep older lines of credit.
- You can obtain a new credit card without the application process and credit check that hurts your credit.
Cons
- Downgrading doesn’t grant access to your credit card company’s full offering of credit cards. As a result, downgrading restricts your choices to a handful of basic cards with the same company. On the other hand, cancelling allows you to apply for whatever card you like from any company.
- You might lose points or rewards you’ve already earned. It’s a good idea to ask your company how to redeem existing rewards before downgrading the card, or if you can keep what you’ve earned while downgrading.
- Signing up for a new credit card can net you substantial cash benefits. Typically, a new credit card will give you hundreds of dollars for a specific amount of use in the first several months and have a 0% introductory APR. Downgrading doesn’t confer this advantage.
DOWNGRADING VS. CANCELLING
With a problematic credit card, you can either downgrade or cancel it to lighten your financial burden. Downgrading lets you keep the line of credit, improving your credit limit and the average age of your account. You’ll continue holding a card with the same company but select among cards with diminished rewards. Lastly, downgrading will essentially give you a backup credit card with no annual fee.
Conversely, cancelling a credit card rids of you of the line of credit altogether. Doing so will likely hurt your credit in the short term because you’ll reduce your credit limit. You might also impact the average age of your account. However, cancelling frees you to apply for credit cards with the best offers and receive significant rewards. Depending on your financial circumstances and priorities, downgrading might be more advantageous than cancelling, especially if you want to save money and have the best credit score possible for a mortgage or auto loan.
