Should You Downgrade Your Credit Card?

It may be a move worth considering.

Some consumers, as a matter of course, will not sign up for a credit card that charges an annual fee. And that's understandable. There are so many cards that don't impose a fee just to maintain an account, so you may feel that paying a fee isn't necessary.

But in some cases, an annual fee can be worth it. The reason? What you pay for your card, you might more than make up in the form of extra cash back or other perks, like air miles. 

However, you might also reach a point where you're ready to cancel a credit card with an annual fee. Before you go that route, you may want to consider downgrading your card instead. 

What does it mean to downgrade a credit card?

Downgrading a credit card means switching to a different card from the same issuer with fewer perks and frills. By downgrading your card, you might end up paying a lower fee or no fee at all. But you might still retain certain perks, like the opportunity to accrue reward points or cash back. 

The pros and cons of downgrading a credit card

Downgrading a credit card could result in a lower annual fee, or no fee at all. Plus, you get to keep your existing account open, and that's really important from a credit score perspective.

The length of your credit history is an important factor that goes into calculating your credit score. By keeping a long-standing account open, you can maintain a solid credit history and help keep your score in good standing. 

Plus, if you downgrade a credit card rather than close out your account, you won't necessarily have to worry about your credit utilization ratio taking a hit. Your utilization ratio is another big factor in calculating your credit score, and it measures how much of your available credit you're using at once. If you downgrade a card with a $5,000 spending limit, you might retain that limit, thereby helping to protect your score.

On the flipside, downgrading a credit card means losing out on certain benefits. It could, in some cases, make more sense to cancel your credit card and find a replacement no- or low-fee card with better perks. 

When does it pay to downgrade a credit card?

If you're paying a hefty annual fee for a card you no longer use a lot, then downgrading it could make a lot of sense. It's one thing to spend $250 a year on a card that gives you hundreds of extra dollars in the form of air miles or hotel points. But if, say, you recently had a baby and have stopped traveling, then you may not need that benefit. 

Also, if money has gotten tight, then downgrading a credit card could be a good way to save yourself a few hundred dollars a year without having to cut back on spending. 

Finally, it could pay to downgrade your credit card if you've found an offer that gives you comparable perks to the ones you're paying for, only without a fee. In that case, you may not want to close your account and risk damage to your credit score. But it could pay to dump that fee and enjoy no-cost perks on another card.

All told, canceling a credit card with a high fee isn't your only option when you grow tired of spending that money. Before you rush to close out a long-standing account, think about whether downgrading your credit card is a better option.