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If you’ve followed the advice of this blog for any amount of time, you’ve probably opened at least a few credit cards to take advantage of the benefits of miles and points for (nearly) free travel. But as you add more and more cards to the wallet, annual fees begin to add up and eventually there is a point of diminishing returns. You might consider closing credit cards to reduce the financial burden, but before doing so there are several important things to consider.
Read this article first before closing any cards!
There’s a certain amount of excitement that comes with opening new credit cards. Maybe you’ve already got a trip in mind and the points will help get you there for less cash out of pocket or in a better class of travel than you would normally want to pay for. Or perhaps a nice cashback bonus or lounge pass caught your eye. Regardless of the reason, after a couple of years of consistently opening credit cards, you may find yourself looking at $1,000 or more in yearly annual fees to sustain “the habit”. While some have a higher budget for these expenses, most of us will need to carefully and consistently consider the costs and benefits of multiple options to make the best choice for our current situation and needs, which can change over time. If you decide that you don’t need or want the costs and benefits of a particular card, here’s a few things to consider.
Don’t Close the Card…Yet
The first rule of reducing your annual fee obligation is not to immediately close your credit cards after you earn the Welcome Bonus. There are many reasons for this, including the fact that you will not be able to receive other benefits of the card for the rest of the year. Also, it can look suspicious to the banks if you consistently open and close cards in a short period of time, and it may affect your ability to open new cards in the future. If you’ve already paid the annual fee, you might as well enjoy the benefits.
Once the annual fee hits your account the next year, there is a 30-day grace period during which you can get it reimbursed if you decide to close the card – but don’t do it just yet. You might be able to get the annual fee waived by calling the bank and simply asking for a “retention offer”. Here’s how the conversation might go:
Agent: “Hello, how may I help you today?”
You: “Hi, I just noticed that the annual fee for my credit card was charged to my account. I realized I haven’t gotten much value from the card lately and am considering closing it but wanted to check and see if there were any retention offers or annual fee waivers available?”
Agent: “Sure, let me check for you. (Pause). It looks like we can waive the annual fee for you this year if you would like to keep the card open. How does that sound?”
You: “Perfect – thanks!”
Whether or not you have an offer to waive the annual fee, or as is becoming more common, to add a certain number of points to your account after additional spending, depends on the bank as well as your “loyalty” – e.g. how long you’ve been a customer and how much you spend on their cards. Every bank is different and the options given to you may change from one day to the next, so if you don’t hear a good offer (and you still have time within the 30-day window to get the annual fee reimbursed), you might hang up and try again later. Important: when you call the bank, do not say to the robo-agent that you want to close the account, because in some instances it will be done automatically without transferring you to an agent first.
If after a couple of tries you still don’t get a decent retention offer, consider downgrading the card to a no-fee version. Most cards with an annual fee have a no-fee version or something similar that the card can be changed to – for example, the Chase Sapphire Preferred(R) card can be downgraded to the regular Sapphire, which does not have an annual fee. Of course you will no longer be eligible for the benefits of the higher-grade card, but it keeps the credit line active which helps increase your credit score by increasing the Average Age of Accounts (AAoA) and the amount of credit extended to you, which accounts for more than 15% of your score.
When to Close a Card
If you strike out with retention offers and downgrades and are sure you are not getting benefits equal to or greater than the annual fee, then you should close the card. Before doing so, double-check to ensure you’ve used as much of the card’s benefits as possible to avoid leaving any value on the table. Then, simply call the bank and ask that the account be closed.
What Happens to my Miles and Points?
When you close a credit card, the points and miles earned might disappear with the account – but not usually. For cards that earn transferable currencies like Chase Ultimate Rewards, American Express Membership Rewards, and Citi ThankYou Points, those points will remain in your account as long as you have another card open that earns the same points. For example, if you were downgrading the Chase Sapphire Preferred(R) to the Sapphire, your points would be retained because the Sapphire earns Ultimate Rewards Points (however, you would lose the ability to transfer those points to airline partners as that is a benefit only available on cards that charge an annual fee). In the case of co-branded airline and hotel cards such as the Southwest Airlines Rapid Rewards(R) Premier Credit Card or the United Explorer card, any miles earned through the card are directly and immediately transferred to your airline account and will not be affected if you close the card.
The accounts most at-risk of losing rewards are those with proprietary points systems such as U.S. Bank’s FlexPoints and Barclay Rewards Points, assuming there is not a no-fee option to downgrade the account to. Before closing an account, make sure you have a plan to use or retain your hard-earned rewards.
Closing credit cards is a natural part of this hobby. Once you are no longer realizing the benefits of a product that are equal to or greater than the annual fee you are paying for it (or perhaps the benefits overlap with another card you would rather keep), it’s time to consider other options. Ideally, you will receive a retention offer from the bank which will allow you to keep the card open for at least another year to enjoy all the benefits. If that’s not available, downgrading to a no-fee option is the next best choice. If neither of those work out, simply close the card and move on – but be sure to have an exit strategy for your points and miles so you don’t leave anything behind.
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Great summary. I didn’t know that a retention offer that offers points instead of waiving the fee was even a possibility.
Thanks! Yes, AMEX is especially fond of offering points instead of waiving the annual fee on their cards. Must look better on their Income sheets :).
The other reason to cancel a card with a sign-up bonus is to get the bonus again. Chase allows this after 2 years. and AMEX who claim they don’t allow it actually does occasionally.
Good point! Some banks (like Citi) won’t let you open a card for a second time while the original is still open, other banks don’t care as much, but that is indeed another reason you might cancel or downgrade a card.
We’ve been doing this as we Two Player Mode the CSP and CSR.
Hey Brandon! Great advice. Another variation that we have ran into with one of the Chase cards is that while they wouldn’t waive the fee they would redeem some points for the fee so that we had no out of pocket expenses. We run all expenses through the card so we have done really well with point. Right now we are building a house with cash but running the charges through the card so that we can harvest the points. By the time the house is finished we should have a very healthy stash of points to use for travel next year.
That’s awesome! Knowing several people who have built houses, I think you’ll probably be ready for that vacation by the time it’s done!
Not sure if you’re contractors will do it or if you’re willing to lose “protections” that a CC gives, but I always negotiate with my contractors for a cash discount. I almost always at least get the discount equal to the CC swipe fee. Success is much less often with materials but some smaller companies will do it too (not Home Depot).
Hi Philip, we negotiated flat fee for contractor. Well worth the price in my opinion. This is not the first time we have built a custom house. We have always contracted ourselves but this time around we saved ourselves the hassle of dealing with vendors, subcontractors, petty bureaucrats and upset neighbors. If something goes wrong we just point to the contractor. We get deep discounts from home depot, Lowes, and local suppliers to include contractors discount plus the other deals that we stumble upon. A good contractor is worth his weight in gold and earns every penny from my point of view. God is good!
Good point about not telling the robo-agent you are closing the card. I’ve found that saying either “representative” or “human” cuts past those steps.
Thanks for writing this! After getting in to travel rewards from listening to the ChooseFI podcast (mostly episode 9), I’ve been curious about how to go about cancelling some of the cards. Given the fees on some of the cards, I think I only want to leave one or two open (ie. Chase Sapphire Preferred). This post gives me a good starting place for how to decide!