We all have different things we’re looking for in credit cards, and over time those things sometimes change, especially in the coronavirus era.
Maybe our spending patterns change, maybe the perks we value change, and in some cases maybe card issuers make changes to cards that are deal-breakers for us.
I have over two dozen credit cards, and whenever an annual fee is due I analyze whether I should keep or cancel the card. If a card isn’t providing ongoing value to me then I don’t keep it.
In this post, I wanted to take a look at how to decide whether to keep or cancel a card, and then what to consider if you do decide to cancel a card.
How to decide whether to keep or cancel a credit card
The way I see it, there are three big factors to consider when applying for a credit card:
- The acquisition bonus (sign-up bonus, welcome bonus, or new cardmember bonus)
- The return on everyday spending
- Perks for simply being a cardmember
Sign-up bonuses can be a great motivator for getting a credit card, though generally those only apply for the first year, so that doesn’t help your ongoing analysis of whether or not a credit card is worth it.
That’s why it makes sense to decide every year whether or not to keep a card. Personally I hold onto cards either for the perks they offer, or for the return on spending that they offer, or in the case of no annual fee cards, for the positive impact they have on my credit score (more on that below).
Let me provide a bit of background on how I go about doing the math on this.
How do I decide whether to keep cards for the perks?
For me, the math is typically quite straightforward about whether cards are worth keeping for the perks. If I got more value out of the perks on a card in the past year than the annual fee, I keep it. If not, I cancel it.
Admittedly coronavirus has adjusted spending patterns and the value of perks, though fortunately, many card issuers have kept up by introducing limited-time perks.
To give a few examples of how I approach the value proposition of cards:
- IHG® Rewards Club Premier Credit Card (review) – $0 Introductory Annual Fee for the first year, thereafter $89. This card offers an anniversary free night certificate valid at a hotel costing up to 40,000 points. Last year I used this at a hotel that would have cost $250
- World Of Hyatt Credit Card (review) – $95 annual fee. This card offers an anniversary free night certificate valid at a Category 1-4 hotel. Last year I used this at a hotel that would have cost $350
- Hilton Honors American Express Aspire Card (review) – $450 annual fee (Rates & Fees). I’ve gotten such outsized value from the free night certificate, $250 resort credit, $250 airline fee credit, and Hilton Honors Diamond status
- Citi® / AAdvantage® Executive World Elite™ Mastercard® (review) – $450 annual fee. It offers an Admirals Club membership for the primary cardmember, and you can add up to 10 authorized users at no additional cost, and each of them gets Admirals Club access when flying American
An Admirals Club membership comes in handy
How do I decide whether to keep cards for the rewards?
Perhaps the trickier math comes with cards that I keep for the return on spending that they offer. To crunch the numbers on that, I look at:
- How many rewards points am I earning for spending on the card?
- What’s the next best option for that spending?
- How much is the annual fee that I’m paying?
- How many perks does the card offer that help offset the annual fee?
Here is one example: The Chase Sapphire Reserve® Card (review) has a $550 annual fee (though this year it’s being discounted by $100 for some), and it’s a card that I’ve historically had primarily for the 3x points on dining and travel that it offers. Right now the card is even offering some limited-time perks, like Chase’s “Pay Yourself Back” feature.
The card offers:
- A $300 travel credit, which I value more or less at face value
- A $60 DoorDash credit in each of 2020 and 2021, which I’ve already gotten full use out of for this year
- A one year Lyft Pink membership, which I’d conservatively value at $100
For this year, I’d estimate I’ve gotten at least $460 of value out of the perks on the card, which is only $90 less than the $550 annual fee. That’s very conservative and doesn’t factor in many of the other perks I’m getting. With the additional $100 credit I’m getting towards the fee this year, I’m already coming out ahead.
On top of that, I’m earning 3x points on dining and travel (and 10x points on Lyft rides, for that matter). When comparing that return on spending to other cards, the math checks out favorably.
The $300 travel credit can be used to outright purchase airline tickets
Advice for canceling credit cards
I figured it would be useful to provide some tips to consider for those who are in a situation where they plan on canceling credit cards. There are some things to be aware of that could potentially save you all your points, or that could even save you on your annual fee.
With that in mind, here are some things to consider when canceling credit cards, in no particular order:
What downgrade options do you have for your credit card?
Outright canceling a card might not always be the best option. If your reason for canceling a card is its annual fee, know that there are sometimes options to downgrade your card to another card that could add value, often one without an annual fee.
For example, if you have the Chase Sapphire Preferred® Card (review) but don’t want to pay the annual fee anymore, you can potentially downgrade the card to the Chase Freedom FlexSM (review) or Chase Freedom Unlimited® (review).
Downgrading to a no annual fee card can often be a good option
Typically the option to downgrade a card is only available if you’ve had a card for at least a year.
Know your options if you’re downgrading. It doesn’t always make sense, but if it’s a card you’ve had for a long time, it could be worthwhile to preserve the account history for the sake of your credit score, as I’ll explain in more detail below.
What happens to your points when you cancel a credit card?
Every point currency works differently, so know what happens to your points if you cancel a card. If you’ve earned hundreds of thousands of points with a credit card over the years it would be awful to cancel your credit card and then find out that all your points are being taken away. Make sure you investigate this before you close your card.
As a general rule of thumb:
- If you have a credit card that accrues points in an airline or hotel loyalty program, you won’t lose your points when you cancel the card; this would include cards like the Marriott Bonvoy Boundless™ Credit Card (review) or United℠ Explorer Card (review)
- If you have a card that earns a bank currency (Amex Membership Rewards, Chase Ultimate Rewards, Citi ThankYou, Capital One, etc.), you typically forfeit your points if you close your card; the exception is if you have another card from that points currency, in which case you can typically pool points
To give some examples of the latter situation, if you have the American Express® Gold Card (review) and it’s the only one you have earning Membership Rewards points, you’d lose your points if you close the card
With bank currencies, you can often pool points across cards
Similarly, Chase has seven cards that they market as “Ultimate Rewards cards”. However, only the Chase Sapphire Reserve®, Chase Sapphire Preferred® Card, and/or Ink Business Preferred® Credit Card allow you to transfer points to partners. You can combine points between cards, which you’ll want to do before closing a specific card. Additionally:
- If you are left without any of the seven UR cards then you’d forfeit all of your points
- If you only have one of the four no annual fee cards, then your points will suddenly only be worth one cent each, which is way less than the value you can otherwise get out of them (though if you get a premium card in the future, you can move the points to that card for extra value)
Every program is different, though. For example, with Citi, you can pool ThankYou points, but if you close a card and transfer points to another card, they expire 60 days after that transfer happens.
Be sure you know the rules, and remember that you can usually transfer out the points before you cancel the card.
Can you be talked into keeping your credit card?
When you call to cancel your credit card, you’ll most likely be connected to a retention specialist. Depending on the type of customer you are, they may make you an offer to try to get you to keep the card. This could come in the form of a waived annual fee, statement credit, bonus points, a bonus on spending, etc.
This won’t always be offered, but sometimes will be. Before you call to cancel your card, put some thought into what the card is really worth to you, and what it would take to keep you as a customer. That way you’re prepared for the call.
You may be offered some sort of a bonus to keep your card
Did you take advantage of all the benefits of a card?
Lots of credit cards offer great benefits, so make sure you take advantage of all of them before closing down a card. For example, The Platinum Card® from American Express (review) offers a $200 annual airline fee credit, which is based on a calendar year. At the moment the card is even offering a $20 monthly credit for both cell phones and streaming services, so to me that’s a $40 monthly value.
If you decide you no longer want the card mid-year, be sure you already used the airline fee credit (and other benefits) for the year prior to canceling the card.
Take advantage of airline fee credits before canceling Amex Platinum
Did you wait until the annual fee hit to cancel your card?
While there are some exceptions, generally you’re best off waiting until the annual fee posts before canceling a card.
There’s not much downside to keeping the card till the next annual fee posts, because you never know what kind of an offer you’ll get. Credit card companies often have promotions, so the longer you keep your card open, the better the odds of getting such a promotion.
Is there a grace period to cancel your card after the annual fee posts?
If you notice that your annual fee on your card has been billed, you’re not always out of luck.
With most issuers, there’s some grace period where you can cancel the card and still get a refund of the annual fee. With American Express, Chase, and Citi, you typically have 30 days after the annual fee is billed to cancel the card and have the annual fee reversed.
How does canceling a credit card impact your credit score?
In the “Beginner’s Guide To Miles & Points,” we have a section entitled “Credit Cards And Credit Scores.” As explained there, the following factors impact your credit score:
- 35% of your score is made up of your payment history
- 30% of your score is your credit utilization
- 15% of your score is your credit history
- 10% of your score is made up of the types of credit you use
- 10% of your score is your request for new credit
Most people don’t understand the little impact that opening and closing credit cards have on your score. If you make your payments on time and don’t utilize too much of your credit, that’s 65% of your score right there. As a result, opening and closing cards impact your score as follows:
- Opening cards ding you when it comes to your requests for new credit (which is only 10% of your score), but helps you when it comes to your total available credit, and hopefully, your credit utilization, meaning that over time having more cards can improve your score
- Closing cards potentially alter your total available credit and credit history; if it’s a card you’ve had for a long time and it has a huge credit line, it may impact your score substantially, while if it’s a card only acquired within the past couple of years, it shouldn’t have much of an effect on your score (of course this depends on how many total cards you have, how far back your credit history goes, etc.)
How does coronavirus impact strategy for closing credit cards?
Admittedly the current situation has greatly changed the value proposition of so many credit cards. How should we be approaching the decision to cancel credit cards in light of this?
- We’ve seen benefits updated on many cards so that the value proposition is still there; for example, the Amex Platinum and Chase Sapphire Reserve have valuable new perks that prevent me from even considering canceling these cards
- For hotel credit cards with free night benefits, we’ve largely seen the expiration date of benefits extended, to give people more flexibility; to me the value on these cards is so outsized that I won’t be canceling them
- I think the cards most at-risk are those offering “soft” travel benefits, like airline cards offering priority boarding and free checked bags, since there’s the least value with those right now
My personal strategy is that I’m giving the benefit of the doubt to cards that I’ve had for a long time but that might not necessarily be “shining” this year. I trust that the value proposition will bounce back.
Meanwhile, for cards I haven’t had for long and where the value isn’t there, I’m much more likely to cancel.
For some people, I think there’s also potentially merit to taking a vastly streamlined approach to credit cards. For example, it could make sense to switch everyday spending to something like the Citi® Double Cash Card (review), offering incredible flexibility to earn cash back or travel rewards.
The simplicity of the Citi Double Cash is more worthwhile than ever before
There are lots of valid reasons to want to cancel a credit card, but just be sure you understand what all that entails. Hopefully the above are some useful tips if you find yourself in that situation.
I think the most important points are to be sure that you understand what closing a card means for your credit score (not much, unless you’ve had the card for a long time), know the downgrade options available to you, and know what happens to the rewards that you earned with your card.
The following links will direct you to the rates and fees for mentioned American Express Cards. These include: Hilton Honors American Express Aspire Card (Rates & Fees).