When to Downgrade a Credit Card Instead of Canceling
If you have an annualized credit card, you have a couple of options to consider if you barely use it: cancel the card entirely, or upgrade to a lower tier card. Since credit cards can be debt traps, you might think that canceling the card is the best option, and that’s certainly a good reason to do so … but you should consider switching to a smaller card first.
You want to maintain a high credit rating
The problem with canceling an existing card is that it can damage your credit score. This is because the more credit you have, the better for your credit utilization rate – a measure of how much debt you are not using. Since this is a good indicator that you are a disciplined borrower, it accounts for up to 30% of your credit rating. For this reason, if you are planning to apply for a large loan in the next few months, it may be the best option to keep your credit rating intact by downgrading your existing card rather than canceling it.
Another factor to consider is the age of your existing credit card: the longer you have it, the better it is, since credit accounts for 15% of your overall credit rating . By downgrading, you would, in effect, transfer your credit card history to a new piece of plastic, while saving on annual fees.
You can keep existing awards
You may have already accumulated bonus points using your existing card. Instead of canceling your card, you might be better off downgrading your card to maintain rewards, especially if the tier downgrade does not include an annual fee.
You can go to the card that better suits your needs
Some cards allow you to move into cashback levels or reward categories that may be slightly different – and more appropriate – for your current spending habits. When considering downgrading, please carefully review the statement credits offered for each card as they differ in what they offer.
For example, the American Express Gold card has Uber credits, but it is not offered as a lower tier green car credit. However, the Green Card has a $ 100 Clear Credit (this is an expedited service to get you to airports faster). In this case, you can get more value from a Clear membership than from an Uber loan, which partially offset the lower $ 150 annual fee.
Bottom line
While downgrading the card has its drawbacks (you will not qualify for the sign up bonus, the benefits will be reduced), it may still be a better option than canceling the card altogether. The only catch is that most lenders won’t let you downgrade for about a year after receiving your card. But that should give you time to evaluate your use and other options, whether it’s a new card altogether or moving to a lower tier card.