4 things to consider before canceling a credit card with an annual fee

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Thinking about canceling that credit card just because they charge you an annual fee? You might want to hold off just a bit…

Read more: 6 credit cards with the best sign-up bonuses right now

Consider this before you cancel that annual fee credit card

Canceling credit cards can have some negative impacts, both financially and otherwise. Here’s what you need to think about:

Weigh the benefits of the card vs. the costs

Yes, this particular card may charge an annual fee, but are there benefits that are outweighing what it costs for you to own and maintain the card?

For instance, does the card pay cash back on purchases? If so, how much cash back are you earning each year? If your cash back rewards are significantly higher than what you pay for your annual fee it is likely worth it to keep the card.

It’s important to consider other card benefits as well. Are you using a travel rewards card that allows you to get deep discounts on your frequent travel schedule? Do you drive extensively and use a credit card that gives great discounts on gasoline purchases?

Add up the total cash value of the benefits you receive from your card and compare it against the annual fee. You might find that paying the annual fee is well worth what you receive in return.

Consider the impact on your credit score

Closing a credit card can have a negative impact on your credit score. Here are some things to consider before you close your annual fee charging credit card.

How long have I had the card?

Longer held credit cards have a weightier impact on your credit score than more recently opened cards. If you’ve had the credit card that you are considering closing for many years, you may not want to close it. That is a move that could cause a drop in your credit score. Consider keeping those credit cards with substantial history open if you don’t have other longer held credit cards or if this one has the best credit record history.

How will closing the card affect my credit utilization ratio?

One of the ways credit scores are measured is by factoring in one’s credit utilization ratio. In other words, what percentage of their available credit is a borrower currently using? For instance, if you have a total of $10,000 in available revolving credit, and your credit card balances total $5,000, you have a credit utilization ratio of 50%.

Credit experts say that keeping your credit utilization ratio under 30% is a good idea. This means that if you have $20,000 in available revolving credit, you shouldn’t have any more than $6,000 in owed balances on those cards.

If closing your annual fee credit card means you are going to increase your credit utilization ratio to a number that is above 30%, you may want to keep the card open to avoid a big dip in your credit score.

Pay close attention to how the card’s rewards are impacting your spending

One good reason to close a card with an annual fee – or any rewards-based credit card for that matter – is to monitor whether or not the card’s reward benefits are encouraging you to spend more money than you normally would. If you are spending more money for the purposes of offsetting the annual fee and earning more rewards bonuses, your rewards card might not be worth it.

Tracking credit card purchases and weighing whether or not there are too many “want” purchases being made will help you decide whether or not it is beneficial to close the card.

Also, consider calling your company and asking them if it’s possible for them to waive the annual fee. Interestingly enough, most consumers are successful when just asking for a reduction or elimination of their annual fee!

If you decide to cancel your credit card…

If you’ve done the research and decided that it is both cost effective to cancel the card and that canceling the card won’t damage your credit, there are several steps you can take to make sure the cancellation of the card is done properly.

Make sure the balance is paid in full

You can’t cancel or close a credit card until it is at a zero balance. If you want to cancel the card but have a balance owing that you can’t afford to pay in cash, look for balance transfer offers that charge little or no transfer fees and offer a 0% interest introductory rate.

Cancel any automatic charges linked to the card

If you are paying any of your monthly bills through the credit card, make sure to re-route the payments to another source before you cancel the credit card. This will help you avoid any late payments on bills.

Redeem outstanding rewards

If you have outstanding rewards available on the card, make sure to redeem them before you close the card if possible. If you wait until after you close the card your reward points may become invalid.

Call the credit card company for cancellation instructions

Each credit card company has different guidelines for credit card cancellation. Call or check the company’s website to get their specific guidelines for closing credit cards issued by them. Then, follow the directions exactly in order to avoid any misunderstandings.

Follow up

After you’ve followed the card cancellation instructions, be sure to follow up with the credit card company by phone or by viewing your credit report to make sure that the card was indeed closed. Know that it may take some time for the closing to be reported to credit bureaus. If it has been more than 30 days since you canceled the card and it’s still showing on your credit report as open, you may want to call the credit card company for verification.


By taking care to explore all potential impacts before you cancel a credit card, you can help make sure that the benefits of closing the card do outweigh the benefits of keeping it open.

Read more: How to spring clean your credit

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Deacon Hayes About the author:
Deacon Hayes is the founder of WellKeptWallet.com which helps people get out of debt in a short period of time. Follow him on Twitter.
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