Avoiding your reward card's annual fee
Tony Mecia is a business journalist who writes for a number of trade and general-interest publications. He writes "Cashing In," a weekly column about credit card rewards programs, for CreditCards.com
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Dear Cashing In,
I hate paying credit card fees. But I love the bonus miles. Will my
credit score be negatively impacted by canceling a frequent flier credit card
when the one-year anniversary is coming due, and with it the annual fee? This
is not a longstanding card, nor a card that will have a balance (I pay my bills
Do I keep the card, pay the fee and just not use it? Or cancel?
At the same time, are there negative consequences to opening too many cards, as
in two a year and then canceling one or both or keeping them with no activity?
Finally, does checking my score with any of the agencies (TransUnion, etc.)
negatively impact my score? Any thoughts on these things? Thanks very much! --
You raise an important question. We all love to talk about the miles
and points we earn and how we spend them for free trips and other goodies, but
we don't always pay attention to the actual costs of earning those miles.
If you pay annual fees, fail to pay your credit card bills on time or
carry a balance, you will incur very real expenses that can cut dramatically
into the value of your "free" trip.
Many -- maybe even the majority -- of rewards cards waive annual
fees for the first year as an incentive to sign up. The card companies then
hope that you'll either forget that the fee is coming up a year later, or that
you'll like the card so much that you won't mind paying it. That certainly can
be true; some airline cards allow you to avoid baggage fees, for instance, so
if you travel just a few times with bags, you'll save more in baggage fees than
you'd spend on a card's annual fee.
Here, though, it sounds as if you've decided that the annual fee is
not worth it to you, but you're worried about the effect that canceling the card would have on your credit score.
The short answer is, yes, canceling a card can ding your credit score because 30 percent of your FICO score is decided by your credit utilization ratio. That's the percentage of available credit you
are currently using on all of your cards. If you cancel a card, you wipe away
that particular credit line, your utilization ratio rises and your credit
score dips temporarily.
It's a minor concern, but closing it will also eventually cause you to
lose some of your credit history. Credit history makes up 15 percent of your
FICO score, but don't worry much about this for another decade: Your history of good payments from closed accounts stays on your credit record for 10 years.
Checking your credit score does not hurt your credit, so never hesitate to monitor your credit.
There are ways to minimize the credit score impact of closing an account, but to avoid it completely, consider a couple of alternatives.
First, you can always ask the card issuer to waive the fee for another year.
Sometimes this works, sometimes it doesn't. It depends on the issuer and on
your history with them.
If you can't get the fee waived, you might consider downgrading to a
card that has no annual fee. Most issuers have no-fee reward cards, and they
would prefer to keep you as a customer. I did this last year. Faced with a $125
annual fee on my Citi ThankYou Premier card, which had been waived the first
year, I called Citi and asked to switch to the ThankYou Preferred card (no
In downgrading, you can typically keep your credit limit the same as
on your old card. The perks won't be as great and you probably won't get a
sign-up bonus like you might with a completely new card, but you avoid a
negative effect on your credit.
Before you downgrade or cancel a card, make sure that you don't
lose your points or miles. This is especially true of bank-operated reward
programs. If the miles are already in a frequent flier account, they're probably
safe, even if you cancel a card, but if the bank controls the points, you could
lose them if you cancel the card.
My wife learned this the hard way two years
ago when she canceled her Capital One Venture Rewards card ($59 annual fee,
waived first year) to avoid the annual fee without realizing that she would
forfeit about 9,000 Capital One miles, worth $90 in travel expenses. When she
called back 30 minutes later, she was told there was nothing she could do: They
were gone forever. Neither of us will be making that mistake again.
See related: Canceling card, reapplying won't earn multiple sign-up bonuses, Will closing a new, unused card hurt my score?, Award charts are key when considering hotel cards
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Published: January 14, 2014