Why you shouldn’t rush to cancel your credit card with an annual fee

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Annual cards are worth keeping.

  • Some credit cards charge an annual fee for maintaining an account.
  • You can keep your card at an annual rate to avoid damaging your credit score.

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There are various reasons why it is beneficial to get a credit card with an annual fee. In some cases, the money you spend on this fee can more than pay off in benefits and rewards.

Imagine that when you receive a card with an annual fee, you are entitled to an additional $ 200 in cash for your annual restaurant purchases. If the commission you pay for this card is $ 95, you are already ahead financially. In addition, some travel reward credit cards that charge an annual fee also have money-saving benefits such as free baggage check-in on flights, making the fee worth paying.

But at some point, you may decide that you no longer want to keep the card with an annual fee. Maybe you feel that this card is not doing you any good, or you no longer need to deal with the commission. Before you rush to cancel a billed annual credit card, consider one specific drawback.

Would closing your account hurt your credit score?

Annual fees can be costly, but also not a very high credit rating.

A low credit score can affect your financial life in many ways. For example, if your result is not the best, the next time you need to borrow money, you may be asked for more money, be it a personal loan or a mortgage. Thus, you need to be careful when closing a credit card, even if you want to charge an annual fee from it.

Closing a credit card can hurt you in two ways. First, if you have had this account for a long time, closing it can shorten your credit history. This, in turn, can lead to a decrease in your score.

Second, an important factor in calculating your credit score is your credit utilization ratio, which measures the percentage of your total credit limit that you use at one time. If this ratio exceeds the 30% mark, it can damage the credit rating. If your annualized card has a generous spending cap, closing it could put your ratio at a disadvantage.

Imagine you owe $ 3,000 and have a total credit limit of $ 10,000 across multiple cards. In this case, everything is fine, because you are not exceeding the 30% mark. But if you close your annual fee card with a $ 3,000 credit limit, your $ 3,000 balance will suddenly run into about 43% utilization, which can dramatically lower your score.

Do this before closing your annual fee card

If you are Indeed You don’t get any benefit from an annualized credit card, you should try to find a way to close it without damaging your credit score. One option is to apply for a different card with a comparable credit limit so that your utilization rate is not affected.

However, there may be another way to explore. Before you hastily close this card, contact the card issuer to see if it is possible to waive the commission. You never know what steps the credit card company will take to keep you on board, so it’s worth talking about this before rushing to cancel your card.

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