One of the most frequent questions I’m asked is, “When should I close a credit card?” Especially right around the time that annual fee comes due. Here’s how to decide whether it’s worth keeping a credit card open, or whether it’s time to close it.
To determine if a card is worth retaining, I generally look at two factors:
1. Perks: What perks am I getting, and what value do they hold for me, i.e. lounge access, free checked bags, room upgrades, spending bonuses, etc.
2. Points: Am I accruing valuable and flexible points that I can use on multiple airlines or alliances? Furthermore, am I earning those points at good ratios? For example, the for example the Chase Sapphire Preferred gives two points per dollar spent on travel and dining and the American Express Premier Rewards Gold card gives 3x on airfare and 2x on gas and groceries. See this post on maximizing category spend bonuses.
If those perks and those points are still giving you value, then you need to consider keeping that card. That’s also true because canceling cards, especially several at once, can hurt your credit score. Your FICO score is based a mix of many different factors and available credit and average age of accounts are two of them. However, your score isn’t going to get ruined forever for closing accounts and it certainly doesn’t make sense to pay hefty annual fees for numerous cards, especially if you’re not using them to earn points.
If you decide you no longer want a card, here are some tips:
1. Call the bank and let them know you want to cancel, but you’ll keep the account open if they waive the annual fee. Some credit card companies (like Citi) have retention teams that will waive annual fees or give big bonuses to keep you as a cardholder. Chase and Amex are less lenient with waiving annual fees, but it never hurts to ask.
2. If they refuse to waive the annual fee, try to downgrade to a card that has no annual fee. FYI most card companies will prorate the annual fee when you cancel the card.
3. If you can’t negotiate either of the above options, just close the account. It’s not the end of the world. However, don’t close a lot of different accounts in one month because you don’t want red flags to be raised with the credit rating agencies, or your FICO score to shift drastically. Make sure you use or transfer all of your points before you cancel a card just in case the bank tries to take them back. I’d also recommend waiting at least 6 months to cancel a card because the card companies can technically take your miles back if you cancel right away, though it’s rare. It’s better to be safe than sorry.