Credit card

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

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There are different reasons why it pays to get a credit card that comes with an annual membership fee. In some cases, the money you spend on these fees could more than offset itself in the form of benefits and rewards.

Imagine that by obtaining an annual membership card, you are entitled to an additional $ 200 in cash back on your annual restaurant purchases. If the fee 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 come with economic benefits, such as free checked baggage on flights, which makes these fees worth paying.

But at some point you may decide that you no longer want to keep a card with an annual fee. Maybe you feel like this card isn’t serving you well, or the fees just aren’t something you want to manage anymore. Before you rush to cancel an annual fee credit card, consider one specific downside.

Will closing your account damage your credit score?

Annual fees can be expensive, but so can a not-so-good credit score.

Have a lower credit rating can affect your financial life in several ways. For example, if your score isn’t the best, you might be charged more the next time you need to borrow money, whether it’s in the form of a personal loan or a mortgage. As such, you will need to be careful when closing a credit card, even if you are eager to offload yourself with the annual fees that come with it.

There are two ways that closing a credit card can hurt you. First, if you’ve had this account for a long time, closing it could reduce your credit history. This could, in turn, lower your score.

Second, an important factor that goes into calculating your credit score is your credit utilization rate, which measures the percentage of your total credit limit that you use at one time. If this ratio exceeds the 30% mark, damage to the credit score can ensue. If your annual membership card has a generous spending limit, closing it could send your ratio into unfavorable territory.

Imagine you owe $ 3,000 and have a total credit limit of $ 10,000 on multiple cards. In this case, all is well, because you are not beyond the 30% mark. But if you close an annual fee card with a $ 3,000 credit limit, suddenly your $ 3,000 balance puts you at around 43% usage, which could drastically lower your score.

Do this before closing an annual membership card

If you really don’t use an annual fee credit card, you should try to find a way to close it without hurting your credit score. One option is to apply for another card with a comparable credit limit so that your usage rate doesn’t suffer.

That said, there may be another avenue to explore. Before rushing to close this card, contact its issuer and see if it is possible to waive your fees. You never know what steps a credit card company will take to keep you on board, so it’s worth having that conversation before you rush to cancel your card.

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