[Update: Some offers mentioned below have expired. You can view the current offers from our partners here —MileagePlus cards from Chase, Chase Sapphire Preferred, Ink Plus, Capital One Venture Rewards and the Barclaycard Arrival Plus. Disclosure: Cards from our partners are mentioned below.]
Rewards credit card users love earning valuable points, miles and cash back with their cards, but they hate the annual fees that many of the top cards require. Naturally, many are left to wonder if there is a way to close their account after getting their rewards to avoid paying its annual fee.
In fact, the annual fee is billed in advance, and cardholders are usually able to close their accounts and receive a credit for the fee paid. For example, Citi allows cardholders close their accounts and receive a credit within 37 days of their annual fee being billed. In other instances, credit card issuers will issue customers a pro-rated refund for any unused portion of the annual fee paid. But closing the card doesn’t have to be your only option.
Affordable Alternatives to Canceling Your Card
If cardholders want to avoid paying an annual fee, they should consider asking for it to be waived before closing their credit card account. In fact, they may not even have to ask. When a customer calls the card issuer to close their account, most card issuers will send them to the retentions department where the customer will be asked why. Cardholders who reply that the annual fee is too high will often have that fee waived, or receive a statement credit of equal size, in an effort by card issuers to retain the account.
Other retention offers can include points or miles worth as much as, or more than, the cost of the annual fee. Finally, credit card issuers might suggest a similar card that has no annual fee, but one with less generous rewards or benefits.
Another strategy for avoiding a credit card’s annual fee is to use rewards to do so. For example, American Express allows cardholders to pay their card’s annual fee with Membership Rewards points, however its points are only worth a half-cent each when redeemed in this way. In contrast, points are worth one cent each when put toward travel reservations, or potentially even more when transferred to airline miles.
Better yet, United Airlines allows customers of its MileagePlus cards from Chase the ability to redeem their frequent flier miles for a credit toward the card’s annual fee. When doing so, miles are worth .8 cents each, which is still less value than a skilled traveler might get from a frequent flier award. In addition, Chase allows customers to redeem their Ultimate Rewards points for statement credits at a rate of one cent per point redeemed, so 9,500 points would be required to pay off the $95 annual fee for the Chase Sapphire Preferred, Ink Bold or Ink Plus cards.
When cardholders are unable to have their annual fee waived, and they no longer feel that paying the fee is worth the rewards or benefits offered, it will make sense to cancel the card to avoid the fee. This is especially true when cardholders consider all of the reward cards currently being offered with no annual fee for the first year. So when credit card users are not particularly impressed by the benefits of a particular card, they can close that account to avoid the annual fee, and apply for a competing card that has no annual fee for the first year.
For instance, the Capital One Venture Rewards and the Barclaycard Arrival Plus compete with each other by offering cardholders double miles on all purchases, where each mile is worth one cent each as statement credits towards travel expenses. These cards have annual fees of $59 and $89 dollars respectively, but both cards offer to waive the annual fee for new applicants for their first year.
Credit card users are fortunate to enjoy an extremely competitive marketplace where their business is highly valued. So when annual fees become unaffordable, there are always plenty of alternatives.
Finally, it’s important for cardholders to be aware of how closing their accounts and applying for new credit can affect their credit scores. If a consumer carries a balance on other cards and closes one account, that can lower the total available credit — effectively increasing their debt utilization. Debt usage is the second most important factor in a credit score, contributing about 30% to the overall score. Opening another card may help, especially if the credit line is about the same, however it’s important to only apply for credit you need. Applying for credit is a smaller factor in a credit score — about 10% of it — and lender inquiries will remain on your credit report for two years. Ultimately, it’s best to keep a low balance (or pay in full), make your payments on time every time, and shop for credit sparingly to help build credit and maintain it. If you want to see how your credit cards are affecting your credit scores, you can get your free credit scores from Credit.com, updated monthly.
At publishing time, the MileagePlus cards from Chase, Chase Sapphire Preferred, Ink Plus, Capital One Venture Rewards and the Barclaycard Arrival Plus are offered through Credit.com product pages, and Credit.com may be compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment.
Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.
Image: Anatoliy Babiy