Should You Close a Credit Card With an Annual Fee?

If you have a credit card with an annual fee and you’re thinking about closing such a credit card because it has an annual fee, you’ve come to the right place as we will discuss what the consequences are for closing a credit card with an annual fee, as well as the alternatives that you have.

Should You Close a Credit Card With an Annual Fee?

Whether you should close a credit card with an annual fee depends on the benefits that come with this card and whether you’re taking full advantage of them. If you’re not taking advantage of the benefits and rewards of a credit card with an annual fee, you should consider closing the card. However, an alternative option that you have is contacting your card issuer and asking them to convert your account into a credit card account that does not have an annual fee. This will assist you with retaining the good credit history you’ve built with your credit card.

Before closing a credit card with an annual fee, you should keep in mind that closing an account can typically lower your credit score. Also, closing a credit card with a long credit history can reduce the total age of your accounts, which can have a negative impact on your credit score. Also, closing a credit card can lower your credit score because it can increase your credit utilization. So, if you have an account in good standing, you should consider alternatives to closing such an account, as well as consider the consequences of closing down a credit card account (more on this below).

The best alternative to closing an account with an annual fee is to contact your card issuer and ask them about the option of converting your account into a credit card that does not have an annual fee. This will allow you to keep the good credit history that you’ve built on your account by transferring it over to an account that does not have an annual fee.

How Do Credit Cards With an Annual Fee Work?

Credit cards with an annual fee work in that a person who opens account is charge a fee on an annual basis, usually the fee is charged on the anniversary of opening the account. For example, if you open an account on January 1st 2021, every January 1st, you will be charged an annual fee. Annual fees typically range from $95 to $495, with some credit cards charging lower amounts or higher amounts for the privilege of having the credit card.

The annual fee on your credit card account is usually charged to your credit card and will show up as a balance on your credit card account. The annual fee will be charged to your credit card account even if you have not been using your credit card. So, to keep your credit card in good standing, you should pay the annual fee in order to keep your account from being reported as late. A late payment notation can cause significant damage to your credit score, especially if you have flawless credit history.

That said, credit cards with annual fees often offer premium benefits and rewards, and so they charge an annual fee to offset the cost associated with offering you the rewards and benefits that they offer. Typically, the higher the annual fee, the more rewards and benefits a card holder will be able to obtain. Rewards and benefits includes points per dollar spent on purchases, access to airport lounges, and the waiver of some fees for certain services.

Having said that, some secure credit cards also charge annual fees, such as $39, but this fee is charged to applicants who have poor credit. Not all secured credit cards come with annual fees, but some of them do and they do not offer any rewards for the fee that they charge.

When Should You Keep a Credit Card With an Annual Fee?

Generally, you should keep a credit card with an annual fee when the rewards and benefits exceed the annual fee that you pay on your credit card. For example, if you have a credit card account that offers cashback, look at how much cashback you’ve earned in the past year, if your cashback earnings exceed the annual fee on your credit card, it might be worth it to keep that card since you’ve earned more money than you paid for to hold the credit card. Furthermore, you should look at other cashback credit cards that offer similar rewards, if they offer the same rewards without an annual fee, it may be worth it for you to switch cards.

That said, if your credit card does not offer cash back, try to estimate the value of the rewards and benefits you receive from the credit card. If the benefits and rewards exceed the annual fee that you pay on the credit card, then the card is probably worth keeping.

However, if you’re not getting a decent return on the money you spend to keep the card, it may be worth it to switch accounts. Some card issuers offer several credit cards and may be able to switch your account to a free one. Converting an account will help you keep the credit history you’ve built on the card by transferring it over to a non-annual fee credit card.

When Should You Close a Credit Card with an Annual Fee?

You should close a credit card with an annual fee in the following situations:

  1. The value of the rewards and benefits that you earn do not exceed the annual fee spent on the card
  2. You do not take full advantage of the benefits the credit card offers
  3. You find a credit card that offers similar benefits without you having to pay an annual fee
  4. The card issuer has changed the rules of the rewards and benefits program to the extent that card no longer offers the value it once offered

Alternatives to Closing a Credit Card That Charges an Annual Fee

Here are some alternative to closing a credit card that charges an annual fee:

  1. Converting the account to a credit card that does not charge an annual fee
  2. Contacting the card issuer and asking them to waive the annual fee
  3. Contacting the card issuer and asking them to provide you with addition rewards in exchange for continuing to keep the credit card open

How Happens to Your Credit Score If You Close a Credit Card with Annual Fee?

Before closing a credit card with an annual fee, you should consider the consequences to your credit score. Typically, when a person closes his or her credit card, he will decrease the amount of available credit he has, thus increasing the total credit utilization. Increasing credit utilization can lower a person’s credit score because credit utilization (how much of your available credit you’re using) accounts for 30% of your credit score. So, when it increases, your credit score will drop. That said, one way to avoid this is to close the card and lower the balances on your other cards to avoid using (utilizing) more of your available credit.

Furthermore, if you have an old account that’s in good standing, you should avoid closing it because it will reduce the overall age of your accounts. Your account age makes up 15% of your credit score. So, the older your accounts, the better your credit score will be. So, to avoid lowering the average age of your accounts, you should consider keeping the account open or converting it to a free credit card with the same card issuer. This will allow you to keep the good credit history you’ve built behind your card.

How Should You Close a Credit Card with an Annual Fee the Right Way?

  1. Ask your card issuer to convert the account into a free account before you close it
  2. Use the rewards in your account because if you close the account you will lose them
  3. Make sure not to leave a balance on the credit card because you could cause significant damage to your credit if you leave an unpaid balance.
  4. Consider the consequences for closing down your account before you close it, it will be too late to do so once the account is closed

Bottom Line

At this point, it should be apparent that you should consider closing down a credit card account with an annual fee if you’re not taking full advantage of the benefits of the card and the rewards you receive do not exceed the annual fee that you’re paying. That said, you should consider some of the consequences associated with closing a credit card account before you close it. If you have any general questions or comments concerning whether you should close a credit card that charges an annual fee, please feel free to leave them in the comments section below.