A credit card product change is a good way to get out of paying an annual fee. It’s also better for your credit score than canceling your existing card. But before you request a product change, consider whether the card you want fits into your card and rewards strategy better than the card you have.
If you’re paying an annual fee on a card you’re not using enough, I recommend a product change.
That’s when you switch to a different card from the same issuer (in this case, one that does not charge an annual fee). A product change is much better from a credit score standpoint than canceling the card. That’s because it keeps your credit line and preserves your credit utilization ratio, which is a key factor in determining your score.
Credit utilization is a fancy way of saying credit you’re using divided by credit available to you. It’s part of “how much you owe,” the category that comprises 30 percent of your FICO score. Only payment history (35 percent) is more important.
Here’s a quick example that illustrates how canceling a card can hurt you:
Let’s say you owe $3,000 across your various credit cards and you have a total credit limit of $10,000. Your credit utilization ratio is 30 percent ($3,000 divided by $10,000), which is pretty good. But if you cancel a card with a $5,000 limit and still owe that same $3,000, now your credit utilization ratio is 60 percent ($3,000 divided by $5,000), which looks a lot worse to the credit bureaus.
In short, you should keep the available credit but lose the annual fee if you’re not getting value from that card.
Product changes are about more than credit scores
A product change can also help when you apply for a card you’re not entirely sure will be useful to you in the long run.
For example, I’m thinking about applying for a card like the Citi Premier Card and its 60,000-point sign-up bonus (worth $750 in airfare when booked through the ThankYou Travel Center) after spending $4,000 on purchases in the first 3 months, but I’m not entirely sure it’s the right card for me.
Citi Premier gives 3 points per dollar on travel and 2 points per dollar at restaurants and on entertainment. But I already have some cards in my wallet that offer me similar rewards.
- I get 3 points per dollar on travel and dining from the Wells Fargo Propel American Express® card.
- I’m receiving 3 percent cash back at U.S. supermarkets (on up to $6,000 per year in purchases, then 1%) from my Blue Cash Everyday® Card from American Express and 5 percent cash back in rotating categories quarterly from the Chase Freedom.
- The biggest hole in my cash back portfolio is my “everything else” spending, which currently goes on the Capital One Quicksilver Cash Rewards Credit Card (1.5 percent on all purchases).
Regular readers of this column know I’m cautious with new card applications and I’ve never had a card with an annual fee. I can give Citi Premier a try, but if that doesn’t work for me I could consider a product change at the end of the first year – switching, for example, to a no-annual-fee-card like the Citi Double Cash Card.
If I had the Double Cash instead of the Quicksilver, I would have earned an extra $257 last year, because the Double Cash gives 1 percent cash back on everything when you buy and another 1 percent when you pay it off.
See related: Sign-up bonuses: How to score big rewards
My thought process
I’m intrigued by the idea of scoring a $655 sign-up bonus by signing up for the Citi Premier, paying the annual fee for a year and then switching to a no-annual-fee card if the card doesn’t prove rewarding enough for me.
But I’m holding back because the Citi Premier wouldn’t do much for me between qualifying for the sign-up bonus and waiting until I’ve had the card long enough to do a product change – Citi requires that I keep a card for at least a year before being eligible for a product change.
I’m also considering the Capital One Venture Rewards Credit Card because it offers 2 miles per dollar on all purchases, along with a sign-up bonus worth $500 when redeemed for travel (50,000 miles after spending $3,000 on purchases in the first 3 months), a Global Entry fee waiver valued at $100 (which also includes TSA Precheck) and no annual fee the first year ($95 after that).
My sticking points? My wife insists we already have enough cards, I’ve never paid an annual fee, Global Entry/TSA Precheck wouldn’t help me on family trips (unless I ditch my poor wife and daughter or we pay for another Global Entry membership out of pocket) and the enduring viewpoint that the grass might be greener just around the corner.
Logically, I know I should get the Capital One Venture or the Citi Double Cash. In reality, I’m still thinking about it.