Understanding Credit Card Annual Fees

Credit card annual fees are typically associated with premium rewards cards, travel cards, and secured cards. These fees are often waived for the first year to attract new cardholders, but they generally apply from the second year onwards. The fee is usually added to your account balance, so even if you don’t use the card, you need to pay the fee to avoid late payment charges.

When to Keep a Credit Card with an Annual Fee

Paying an annual fee can be worthwhile if you are maximizing the rewards and benefits offered by the card. Here are some scenarios where keeping the card makes sense:

• High Rewards: If the rewards you earn exceed the annual fee, it might be worth keeping the card. Use your account history to estimate your annual rewards.
• Cardholder Benefits: Benefits like airport lounge access, free hotel stays, rental car coverage, and statement credits can justify the annual fee if you use them frequently.
• Introductory Offers: If you are using a 0% APR offer for purchases or balance transfers, you may need to keep the card open until the balance is paid off.

When to Cancel a Credit Card with an Annual Fee

There are times when canceling a credit card with an annual fee might be the better option:

• Mental Energy: Managing rewards and benefits can be time-consuming. A simpler, no-annual-fee card might be a better fit.
• Low Rewards: If the rewards are not significantly higher than those offered by no-annual-fee cards, it might not be worth the fee.
• Unused Benefits: If you rarely use the card’s benefits or if your lifestyle has changed, the annual fee may not be justified.
• Program Changes: Changes in the card’s benefits or rewards program can make the card less valuable.

Consider Downgrading Instead of Canceling

Downgrading to a card with fewer benefits and no annual fee can be a good alternative to canceling. This option has several advantages:

• No Impact on Credit Score: Downgrading does not affect your credit score as it keeps your account open.
• Retain Rewards: You can keep your rewards if you downgrade within the same rewards program.
• Maintain APR Offers: While promotional APR offers may not transfer, the standard APR usually remains the same.

Contact your card issuer to discuss downgrading options.

Impact of Canceling a Credit Card on Your Credit Score

Canceling a credit card can affect your credit score in several ways:

• Credit Utilization: Closing a card reduces your available credit, which can increase your credit utilization ratio and lower your score.
• Credit Mix: Having a mix of credit types helps your score. Closing your only credit card can reduce your credit mix.
• Average Age of Accounts: Closed accounts stay on your report for up to 10 years, but once they fall off, your average account age may decrease, impacting your score.

Keeping your credit cards open is generally better for your credit score. Consider downgrading or asking for a fee waiver before canceling.

Conclusion

Deciding whether to keep or cancel a credit card with an annual fee depends on your personal financial situation and how much value you derive from the card. If you need assistance with your mortgage needs, O1ne Mortgage is here to help. Call us at 213-732-3074 for expert advice and services.