If you are paying annual fees on credit cards you’re not using much during the coronavirus pandemic, you may want to consider downgrading your cards.
Cards with annual fees often offer superior benefits and rewards programs, but those based on things like travel or dining and entertainment may not be as valuable as they once were due to personal travel and consumption restrictions resulting from the spread of COVID-19.
Rather than canceling these cards to save money, some issuers may offer the opportunity to downgrade to a card that either lowers or eliminates your annual fee.
The downside, of course, is that you may be forced to forfeit some of the benefits you’ve been accustomed to with your annual fee card.
Team Clark wants you to make an informed decision on any changes you make to your credit card. We’ll walk you through three reasons why downgrading your credit card could be helpful and three things to consider before getting rid of your current card. Then, we’ll offer some advice on how to go about requesting a credit card downgrade.
3 Reasons Downgrading Your Credit Card Could Be Beneficial
1. You’ll Save Money on Annual Fees
If you’re in a financial pinch due to the impact of the virus, downgrading from a high annual fee card can be an easy way to free up some additional funds. Some rewards credit cards carry annual fees of $500 or more, so the impact could be significant.
It’s important to note that you likely won’t be able to simply “pick a new card,” though. Check with your card issuer to see if your annual fee card has a similarly-themed card that you may be eligible to downgrade to for a lower fee.
Many credit cards are grouped in families, like the Capital One Savor and Capital One SavorOne. While the Savor, which is a cash back card geared toward dining and entertainment, carries a $95 annual fee, the similarly constructed SavorOne does not have one.
Requesting a move “down the ladder” in a family of credit cards may cost you things like better cash back rewards, but you also could potentially keep some of the same benefits.
2. You’ll Protect Your Credit Rating by Avoiding Cancellation
If you have been weighing the idea of canceling your card with an annual fee, you may be better off seeking a downgrade instead.
As noted in Team Clark’s guide to canceling a credit card, there are credit score consequences to a cancellation.
Your credit score is calculated using five key components:
Payment history (35%)
Credit utilization (30%)
Length of credit (15%)
New credit (10%)
Credit mix (10%)
Closing a credit card account could impact three of these: Credit utilization, length of credit and credit mix.
3. You Can Preserve Your Credit Limit
Navigating things like employment uncertainty during a pandemic can increase the need for access to a line of credit.
If you opt to downgrade your credit card rather than cancel it, you should be able to keep at least some of your available credit limit. Access to this could prove important until the economy stabilizes.
3 Things to Consider Before Downgrading Your Credit Card
1. You’re Likely Going to Forfeit Your Rewards
If you are someone who was a frequent traveler before the virus stopped you in your tracks, it’s likely that you may have accumulated substantial airline or hotel rewards points on a card with an annual fee.
Check with your card issuer, but there’s a good chance that they’ll ask you to forfeit or reduce those rewards balances as a part of the downgrading process.
Those free flights or nights do have value, so you’ll want to consider that carefully if you are thinking about a downgrade.
2. You Could Be Required to Forfeit a Welcome Bonus
If you recently signed up for a credit card that had a welcome bonus, you could be forfeiting whatever perk you were receiving if you request a downgrade.
The best way to know for sure is to read the fine print on the agreement for the card you’re considering downgrading.
For example, I went through the fine print on an American Express card and found the following caveat to a welcome bonus if you downgrade within your first 12 months of card membership:
If we in our sole discretion determine that you have engaged in abuse, misuse, or gaming in connection with the welcome offer in any way or that you intend to do so (for example, if you applied for one or more cards to obtain a welcome offer (s) that we did not intend for you; if you cancel or downgrade your account within 12 months after acquiring it; or if you cancel or return purchases you made to meet the Threshold Amount), we may not credit the statement credit to, we may freeze the statement credit credited to, or we may take away the statement credit from your account. We may also cancel this Card account and other Card accounts you may have with us.
3. You’re Likely Going to Miss Out on Signup Perks on the New Card
If you make the decision to downgrade, don’t expect to get the welcome bonus associated with your new card. It doesn’t hurt to ask your card issuer if you qualify, but things like introductory 0% APR periods or lump-sum cash back bonuses are usually reserved for “new” card members.
How To Downgrade Your Credit Card
Remember, just because you’d like to downgrade your card doesn’t necessarily mean that your card issuer will be willing to go along with it. Each person’s credit situation is unique, and each card issuer is going to handle these requests a little bit differently.
The best course of action is to communicate your desire with your card issuer and explore the options they give you. We’re in some uncharted financial waters as a result of COVID-19, so card issuers may be more flexible than usual.
While a phone call is perfectly acceptable for doing this, money expert Clark Howard actually prefers to use online chat options with the credit card companies.
This is so you can retain documentation of your conversation for proof of discussion and agreement of terms, if needed. Most of these credit card online chat services have the option to email a copy of the discussion to yourself, but you can also take a screenshot.
When you get in touch with your card services department, make sure you cover the following:
- Request a downgrade, not a cancellation
- Inquire about any potential fees associated with changing cards
- Ask about retaining any benefits you value with your current card
- Get a clear understanding of the timeline for the change, including how it will impact your billing cycle
To access the online chat for your credit card service, you’ll likely need to log in to your card account via either the card issuer’s app or website. It should require the same credentials you use to login to pay your bill each month.
Note: Due to the coronavirus pandemic, you may have to endure longer than usual wait times when contacting your card issuer.
The coronavirus pandemic has many Americans making tough financial decisions. Downgrading your credit card is just one of many potential solutions for improving your finances during these uncertain times.
If you’re someone who has enjoyed the benefits of a rewards card with an annual fee, you’ll have to do some analysis to see if the money you’d save downgrading to a card with no annual fee is worth the potential loss of benefits and earned rewards.
Before canceling your card, downgrading or biting the bullet on another year’s worth of fees, Team Clark recommends opening a dialogue with your card issuer to fully understand your options.
Do you have experience downgrading your credit card? Let us know about it in the comments below!