When to Cancel a Credit Card With an Annual Fee

What Is a Credit Card Annual Fee?

A credit card annual fee is a yearly charge some card issuers require you to pay to keep the account open. Depending on the card, the fee may be charged immediately after you open the account or after the first year if the issuer offers a waiver. Then, the annual fee is typically added to your balance each year on your card anniversary.

Credit cards with annual fees often offer premium rewards, extensive perks and valuable benefits. Cards that commonly charge annual fees include:

• Travel credit cards
• Cash back cards
• Premium or luxury credit cards
• Business credit cards
• Some secured credit cards

Annual fees can vary significantly. You can expect to pay a $95 annual fee for mid-tier credit cards and $250 to $895 for premium travel and luxury credit cards. In exchange for paying an annual fee, you can expect more valuable benefits, including:

• Higher rewards rates
• Larger welcome bonuses
• Travel credits
• Airport lounge access
• Hotel or airline perks
• Dining and entertainment benefits

Tip: You can find a credit card's annual fee in the pricing and terms disclosure before applying.

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When Does Keeping the Card Make Sense?

Keeping a credit card with an annual fee may be worthwhile if the rewards and benefits outweigh the cost.

• You earn more in rewards than the fee costs. Review how much value you earned from the card over the past year. If the value of your rewards exceeds the annual fee and you expect your spending habits to remain similar, the fee may pay for itself.
• You regularly use the card's perks. Premium benefits can offset the costs of an annual fee if you use them often. Features like airport lounge access, certificates for free hotel rooms, primary rental car coverage, free checked bags and statement credits help you save money.
• You're still using an intro 0% APR offer. If you opened the credit card for a promotional 0% annual percentage rate (APR) offer, keeping the account open while you pay off the balance may make sense.
• You want to apply for other rewards cards. Closing a rewards card too soon after earning a welcome bonus can impact your eligibility for future welcome offers for other cards from the same issuer. Some issuers limit how often you can receive bonuses or may frown upon repeated account openings and closings.

Learn more: What Is Credit Card Churning?

When Should You Consider Canceling Your Card?

In some situations, the annual fee may no longer justify keeping the card open.

• You aren't earning enough rewards. High rewards may not matter if you rarely use the card or don't spend heavily in the bonus categories. In that case, the annual fee could outweigh the value you receive.
• You want to reduce expenses. An annual fee is an added expense that you can easily cut if you're simplifying your budget or cutting unnecessary expenses.
• You rarely use the card's benefits. Some cardholder benefits become less valuable over time. For example, you may travel less frequently than before or find some benefits now have limitations that make them hard to use.
• You prefer another card. If another credit card matches your spending habits and you rarely use the one with the annual fee, keeping both may no longer make sense.

Learn more: How to Cancel a Credit Card

How Canceling a Credit Card Impacts Your Credit Score

Closing a credit card can affect your credit score in several ways, especially if the card has a high limit or long credit history.

• Higher credit utilization: When you close a credit card, your available revolving credit decreases, your credit utilization ratio may increase, which could hurt your credit scores. If you have other credit cards, you may be able to offset the impact by paying down their balances or using them for fewer purchases.
• Change in credit mix: Having a mix of open revolving accounts and installment loans can help your credit score. If you close your only credit card, it may hurt your credit mix and your credit, albeit typically a small amount.
• Reduce average age of accounts over time: Closed credit cards in good standing typically remain on your credit report for up to 10 years. Once the account eventually falls off your report, your average age of accounts may decrease, which could negatively impact your scores.

Closing a credit card may have less impact if you have several open cards with low balances or if the account is relatively new. On the other hand, keeping the card may make sense if it's one of your oldest accounts, has a high credit limit or you plan to apply for a loan soon and don't want to risk a dip in your credit score.

Alternatives to Canceling Your Credit Card

Canceling the card isn't your only option to avoid the annual fee. Depending on the card issuer, you may be able to reduce or avoid the fee while keeping the account open.

• Ask for a retention offer. Contact the card issuer and explain that you're unsure whether the annual fee is still worth it. Some card issuers offer retention offers to keep existing customers, especially long-standing cardholders with regular spending. You could be offered a fee reduction, statement credit, bonus rewards or another temporary promotional offer.
• Downgrade to a no-annual-fee credit card. Many premium rewards credit cards also have a no-annual-fee version within the same family. You may be able to downgrade your account to avoid the annual fee while keeping your existing account number and credit history.
• Switch to another credit card. Instead of downgrading, consider switching to another credit card that better fits your spending habits. For example, you might move from a travel card to a cash back card.

Tip: Before downgrading or closing a card, consider redeeming or transferring any rewards you've earned to avoid forfeiting them.

Frequently Asked Questions

The Bottom Line

Canceling a credit card can make sense if the card no longer provides enough value. But, before closing the account, consider how it could affect your credit scores, rewards and eligibility for future welcome offers. In some cases, asking for a retention offer or switching to a lower-cost card may help you avoid the fee without giving up the account entirely.