Why It Might Be Better To Downgrade Your Credit Card Than Cancelling It
Not all credit cards are equal. Some offer intriguing perks to the holder such as gas points, travel miles, cashback dollars, and other promotional items. In order to benefit from these perks, issuers charge monthly card fees that can range anywhere from $50 - $500 a year.
However, a change in one’s financial situation can make these benefits no longer appealing, but still, leave them paying high yearly account fees. If it’s just one card, it may not seem like a big deal, but if a consumer has 3 or 4 cards carrying promotional advantages, it could be quite costly.
Those in this situation may be tempted to cancel the cards outright, but this can have damaging effects on one’s credit report. Instead, applying for a credit downgrade may be a better strategy.
What Does It Mean To Downgrade Your Card?
Downgrading a card means switching to a different card with fewer promotions and yearly fees. Should there be any balance on the original card, that balance would be transferred over the new card, along with payment history, transaction details, and credit limit.
When downgrading, no new inquiry is listed on the cardholder's credit report, saving them from any possible negative effects on their credit rating. The individuals continue to use the card the same as before but enjoy the lower fees.
Some issuers have strict rules on what type of cards can be downgraded and what specific cards they can be downgraded to. There is also the chance that any promotional points or entitlements can be lost, so the cardholder should conduct their own due diligence in this regard.
It is common for smaller issuers, such as credit unions or small regional banks, to not offer card downgrades. Others will only allow card downgrades within the same family of products, and most will not allow downgrades between issuers.
What Happens When You Cancel Your Credit Card
Canceling one’s credit card may save them money on unnecessary yearly fees, but it can harm their credit score. This is because the credit utilization ratio and account length may be affected, thus resulting in a lower score.
- Increases Credit Utilization Ratio: Credit utilization makes up a large portion of an individual's credit score. Typically speaking, one’s credit utilization ratio should be 30% or lower if they wish to maintain a good credit score. Canceling credit accounts can lower the total amount of available credit, thus increasing the utilization ratio.
- Length Of Credit Matters: Length of credit is another factor credit bureaus use to determine one’s credit score. The more well-established accounts they have, the higher their credit score; lenders do not like to see several new accounts on an applicant's credit history. When canceling a card, an individual should consider how old that particular account is and how it will affect their credit rating.
How To Downgrade
Downgrading is a simple process and involves contacting the issuing party to see what their policy is on card downgrades. If they do offer downgrades, they will provide the cardholder with a list of products that their current card can be successfully downgraded to. It is important to consider the following.
- Savings: Of the available options, which one offers the most savings? Downgrading to a product that is only slightly cheaper and offers next to no benefits may not be worth it for some people.
- Confirm What Will Happen To Promotional Entitlements: Many cards offer redeemable points, cashback dollars, travel options, or insurance coverage. Those who have unused promotional entitlements should make sure they will not be giving them up for nothing.
- Consider Credit Limit: Some credit card products have different max limits. Cards with yearly fees typically offer higher limits than cards with little or no yearly fees. If one downgrades to a card with a significantly lower credit limit it may increase their credit utilization ratio, which in turn will lower their credit score.
When a card's promotional benefits are no longer enticing, a cardholder may consider canceling it altogether to avoid paying the accompanying fees. While this may seem like a prudent financial decision, in most cases, downgrading the card is a better choice.
Canceling a card can cause the holders credit rating to suffer, primarily by lowering their credit utilization ratio. Instead, individuals should consider downgrading their card to another product that carries little or no yearly fees. While the holder may lose any promotional benefits the original card offers, they will be saving in yearly account fees.
For those who have several cards to downgrade, this can mean saving anywhere from $500 - $2000 a year depending on what credit cards they currently have.