Rewards card switch: from fee to no-fee
How to minimize the effects on your credit when you find a better card

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Dear Cashing In,
I have had a Citibank American Airlines AAdvantage card for a couple
of years and a Capital One Venture for about a year. These are my only two
credit cards. I got charged the annual fee of $100 for my American card this
month. Ideally, I would like to cancel this card and sign up for another that
will provide me with frequent flier miles at a better rate than 1:1.
Should I downgrade my credit card to one that doesn't have a fee but is still a Citibank card so that I don't cancel the card altogether and hurt my credit (while still signing up for another card)? Or will that still be the equivalent of canceling a credit card in the credit report world? Also, how harmful is it to open two credit card accounts with two different companies/airlines at this point in time? If my credit were to diminish at all, would it still go back to where it is now assuming I did all the right things and paid everything off every month? I have no plans to buy a house for about two years. -- Elena
Dear Elena,
The questions you are asking are ones that are probably on the minds of a lot of people these days. People often see credit card offers that they like, but they worry about their credit and what happens if they sign up for too many cards or cancel too many cards.
You can read up on exactly how credit scores are calculated. It is true that signing up for new cards and canceling old cards cause a small, temporary downgrade to your credit score: Applying for a new card suggests that you may need new credit, which is a tiny red flag. The dominant credit rating agency, FICO, says new inquiries typically lower FICO scores by five points or fewer. Canceling an existing card is also potentially harmful to your score, as it raises your ratio of debt to available credit (credit utilization).
However, if you pay your bills in full and on time, your score should recover within a few months.
It's also possible to have excellent credit even if you open and close cards regularly and have a lot of accounts. For my story, "Churning crackdown worries credit card rewards chasers," I interviewed someone who has more than 15 open cards. He pays his bills every month and says he has a credit score of 765.
If you don't want to pay a hefty annual fee for a card you don't use, by all means cancel it or downgrade to a no-fee card. When you call to ditch the card, Citi might try to sweet talk you with the promise of additional miles or other perks to get you to stay, so be ready for that. No-fee rewards cards from Citi include the Citi ThankYou Preferred Visa, the Citi Dividend Platinum Select Visa and the Citi Hilton HHonors Visa, so check those out and see if one appeals to you.
If you switch to a new card from the same bank, some card companies count that as an inquiry for a separate card, while others don't.
I would not fear the minor and short-term hit to your credit rating, especially if you're not planning to buy a house or car. Just get the cards that are best for you, be a responsible cardholder, and the credit-score implications will work themselves out.
See related: Switching to a new card from the same bank, Avoiding your reward card's annual fee
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