After a layoff, look hard at your rewards cards

Mike Cetera
Personal finance writer
Writes about banking, credit cards and mobile finance.

Here's when you should and perhaps shouldn't downgrade a rewards card when money is tight.

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Losing your job may require some major budget tweaking, including taking a hard look at any rewards cards in your wallet.

First, you’ll need to account for the things you must continue to pay, such as rent or a mortgage, your car loan and utilities. Then, you’ll want to find ways to cut unnecessary spending (so long, Spotify).

Cash flow is the most important thing. You want to tap any savings to supplement the cash flow until you get past the hardship.

“What you don’t want to do is rely on credit cards to get by or use your retirement account to fund your daily living,” says Steve Repak, a certified financial planner and author of “6 Week Money Challenge.”

After reducing or eliminating nonessential spending from your budget – think gym memberships, streaming subscriptions and dining out – your next target may well be your credit cards, particularly premium rewards cards that carry high annual fees.

If, for example, you applied for the Chase Sapphire Reserve ($450 annual fee) before its huge sign-up bonus expired in early 2017, you could save more than $350 a year by switching to the still-points-rich-but-less-expensive Chase Sapphire Preferred (annual fee: $95) before the Reserve renews. That way, any rewards points you have remaining in the Chase Ultimate Rewards program will be preserved, though the points are worth less with the Preferred when redeemed for travel.

Here’s when you should – and perhaps shouldn’t – downgrade a rewards card when money is tight.

When you should consider a downgrade

You should certainly consider shedding cards with high annual fees after a job loss, but that’s not the only time it might make sense, says Daniel Tulbovich, co-founder of RewardExpert.com.

"The first thing I did was find ways to cut down on fees and expenses, such as switching to a credit card with no fees."

“One of the other reasons would be is if it’s not a good fit for you,” Tulbovich says.

Nearly 4 in 10 U.S. adults say they haven’t changed their most used credit card in a decade, according to CreditCards.com research. If you have a travel rewards card and you’re not taking as many trips as you once did – especially as a result of a layoff – it’s time to consider other options.

“On average, you need to spend about $2,000 a month to actually pay off the annual fee and start earning the rewards,” Tulbovich says. “A lot of those cards are created for high spenders. Obviously, if you are laid off ... I think downgrading the card is the right thing to do.”

Many major issuers that offer cards with an annual fee may allow cardholders to downgrade to a low- or no-annual fee credit card, but the rules vary and “they’re not clearly written,” Tubovich says. You may not find any language in your credit card agreement that spells out when or if the issuer will restrict you from switching to a less-expensive card.

“Give a call and be very clear and be sure the bank representative knows what you want,” he says.

But don’t feel obligated to tell the issuer you’ve lost your job, as you don’t have to give a reason why you want to switch cards, says William Charles, founder of Doctor of Credit.

“You’re not required to volunteer that your financial position has changed,” he says.

You should inquire whether you can keep your accumulated points, miles or cash and whether the issuer will rebate a prorated portion of your annual fee if you downgrade. If the issuer agrees to rebate a portion of your annual fee, a downgrade can be a smart move even if you’ve recently passed your card anniversary.

When downgrading, you’ll almost lose certainly lose some of the perks that helped make the premium card a great choice when you were employed. You’ll also generally earn rewards at a lower rate, but that shouldn’t be a consideration, says Jeff White, a financial analyst at FitSmallBusiness.com.

Using the Chase Sapphire example, you’ll lose 1 point per $1 you spend on travel and dining when you downgrade from the Reserve to the Preferred.

“But again, that’s not a big loss since you’re likely to cut those expenses from your budget entirely until your cash flow increases,” White says. “For all other uses of the card, your reward stays the same.”

When you shouldn’t consider a downgrade

There are three clear times when issuers may not let you downgrade:

  • Issuers will not let you switch from a business card to a consumer card or vice versa, says Anya Kartashova, who has written about downgrading credit cards at FrugalTravelGuy.com.
  • You also may not be able to ditch your co-branded airline or hotel card for another card by that issuer not tied to the travel partner. “For example, you cannot go from the Starwood Preferred Guest credit card to an AmEx EveryDay credit card,” Kartashova says.
  • And, if you’re an American Express customer, it may be wise to ditch the premium $550 annual fee that comes with the Platinum card, for example, but the issuer won’t allow you to switch from a charge card to a credit card. You’ll have to move to something like the American Express Green card.

Should you just cancel the card?

If you’re out of work, it may be tempting to simply close your credit card accounts to avoid a high annual fee rather than downgrading your card. But that choice could hurt you in multiple ways.

While it’s best not to build credit card balances while unemployed, with no or little income you may need to rely on credit more during your job search. Ditching one or more of your credit cards eliminates this financial option.

"Along with debt consolidation, you may also consider switching from a premium card to a cash back card, which can help put some cash back in your pocket while searching for a new job."

What’s more, closing credit cards could negatively impact your credit score, Repak says.

One of the factors that helps determine your credit score is your balance-to-limit ratio or credit utilization ratio. That ratio is a comparison of how much credit you use versus how much credit lenders have extended to you.

Since premium credit cards tend to have high credit limits, closing out a credit card because its annual fee is no longer affordable could ding your credit score, particularly if you have other accounts with large balances.

Still, if you have excellent credit, Tulbovich says you shouldn’t worry too much about the impact of canceling the card, especially if it’s a card you haven’t had for very long. (The length of your credit history is also a factor in your credit score.)

“If it’s not the oldest account you have, you shouldn’t worry,” he says. “It won’t affect you much.”

Other ways to save on credit cards

If you have outstanding balances, make sure you keep up with minimum payments. You can try to lower those monthly minimums by asking for a lower interest rate. According to a 2017 poll by CreditCards.com, 69 percent of cardholders who asked for a lower interest rate were granted one.

Or, you can try to consolidate your debt by using a balance transfer card, as April Davis of Minneapolis did after she was laid off in 2009.

“The first thing I did was find ways to cut down on fees and expenses, such as switching to a credit card with no fees,” says Davis, the founder and CEO of LUMA, a luxury matchmaking service.

Applying for a balance transfer credit card may prove tricky, however, when you don’t have a job. On new credit applications, you’ll likely be asked about income. Don’t lie on your card application, as that’s akin to fraud, Charles says

“Although, keep in mind that credit card applications are based off expected income for the coming year, based off your past year,” White says. “So if you expect around the same income due to your job prospects or resourcefulness, then that may be enough for some credit card companies if you have strong credit.”

One other option: Take advantage of a balance transfer offer from one of your existing credit cards. In this case, you may not be asked to state your income.

Along with debt consolidation, you may also consider switching from a premium card to a cash back card, which can help put some cash back in your pocket while searching for a new job, White says.

Using your card to pay for expenses – such as utility bills – and then paying that balance off each month will generate extra cash, both now and after you land a new job, White says. Just make sure you don’t incur convenience fees for paying with your credit card.

“This extra cash can come in handy when you’re unemployed, or it could help you with job-search costs, such as a professional resume writer,” he says. “When you get a job again, you can continue doing this and just pocket extra cash every month while building your credit responsibly.”

See related: Script to ask for a lower card APR, Get through unemployment without borrowing


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Updated: 06-22-2018