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Updated on Thursday, April 12, 2018
Springtime is almost like the second coming of the new year — the weather is warmer, resolutions are renewed with new vigor and every other article is sharing advice with you about decluttering your life. Purging unneeded or expensive credit cards is common advice when spring cleaning your finances. Some credit cards, like rewards cards, involve a little more care and tact than closing any old regular credit card.
Rewards credit cards are, generally speaking, the most expensive credit cards to keep open, so they may be on your purge list if you’re not using them enough to make the associated costs worth it.
As a recent MagnifyMoney study found, the sign-up bonuses many reward cards offer come at a steep cost to consumers. The average annual fee on a card with a bonus offer is $120, up 62% from 2008. However, in the lenders’ defense, they’ve also bulked up rewards offerings on new credit cards in the time. A separate 2017 MagnifyMoney study found, since 2010, what banks spend to support credit card rewards has more than doubled, from $10.6 billion to $22.6 billion.
If you’re ready to ditch your rewards card, you’ll want to make sure it’s done with your best interest in mind — a minimal loss of rewards and a minimal change to your credit score. Here are a few tips on the right way to close a rewards card when the cost isn’t worth the benefit.
When it makes sense to cancel a rewards credit card
When the rewards stop being worth the fee. Generally speaking, you should do a cost-benefit analysis in any situation to determine if keeping a credit card open is worth the fees associated if it charges any.
Todd Ossenfort, chief operating officer of Rapid City, S.D.-based Pioneer Credit Counseling, says to cancel the rewards card if it’s not getting used and you don’t take advantage of the rewards they offer. Most rewards cards charge a fee, so check to see if you’re paying one before you ditch your bank.
If you like earning rewards, sans the annual fee, there are rewards cards that don’t charge an annual fee but offer lucrative cash back rewards like the Citi® Double Cash Card – 18 month BT offer. You Earn 2% on every purchase with unlimited 1% cash back when you buy, plus an additional 1% as you pay for those purchases. or the Uber Visa Card which rewards spending in certain categories. The Uber cards award cardholders 5% back in Uber Cash on Uber, Uber Eats, and JUMP, 3% back in Uber Cash on dining, hotels, and airfare and 1% back in Uber Cash on all other purchases
If rewards are reduced or terms are changed by the issuer. Another thing that may alert you to close a rewards card is changing terms that may reduce the overall benefit of keeping the card open.
“Look for things like a sharp increase in the card’s interest rate, cutting back on benefits like auto insurance or trip protection or downgrades of ways you can earn points and miles,” says Benet J. Wilson, associate credit cards editor for CompareCards.com, another LendingTree-owned site.
Remember, companies generally reserve the right to alter the card’s terms at any point.
“Credit card holders always have boilerplate language that covers them if or when they decide to change benefits, but when it happens, it should always serve as a warning flag,” says Wilson.
Follow these tips to close a rewards card the right way
Closing a rewards credit card can be a bit more nuanced than closing any regular old credit card. Here are a few tips you can use to make sure the process is smooth sailing.
Reach out to the bank before they charge your annual fee
Plan to close the card a few months ahead of the date the annual fee will be charged to the account. Otherwise, you may find yourself paying for another year of rewards you may not benefit from.
“Be proactive and call the creditor,” says Ossenfort. “Don’t put the card in the drawer and forget about it until they charge the annual fee and then try to cancel. More than likely they will cancel the card and still have you pay the fee.”
Still carrying a fee? Pay it down or transfer the balance to a new card
You’ll need to zero out any balance on the account before you’ll be permitted to close the card. To do this, you’ll need to pay any balance in full or have it transferred to another card.
If you transfer, you’ll ideally want to move the balance to a card that won’t charge you a higher interest rate on the balance you transfer. Here are some balance transfer options to consider in case you need to use one.
Use your rewards before you lose them
Use up any existing rewards you’ve accumulated on the card before you close the account if you can — after all, you’ve earned them.
You may decide to cash out any cash back rewards to your bank account or choose to apply them to your statement credit. If you can apply rewards to purchase gift cards or other items in a marketplace, that may also be an option. If you have a partner who is enrolled in the same rewards program with the bank, you may have the option to transfer your points to your partner’s account before you close the card.
If the card is co-branded with an airline, hotel or another company, like Uber, and you’ve accumulated miles or points in an associated account, those will likely stay available to you to use after closing until the miles or points expire. However, if it’s a bank, like Chase or Capital One, you’ll generally lose the points if you close the account and have no other cards linked to the program.
One big thing to watch out for here is not incurring extra debt in the process, says Ossenfort.
“I wouldn’t recommend using 5,000 points towards any trip if it’s going to cost you another $1,000 just because [you don’t want to lose the points],” says Ossenfort.
Prepare for a drop in your credit score for 30-90 days
A common warning you’ll get if you talk about closing a credit card is that it can hurt your credit. Sometimes, that ding to your score could be worth the temporary pain if it means saving you money in the long run.
Closing a credit card could reduce your overall available credit limit, resulting in an increase in your utilization ratio — a factor that contributes to about 30% of your credit score. The ratio is your total used credit in relation to your total available credit. The higher your utilization ratio, the more it can negatively affect your FICO score.
“Don’t close a card and think that it will help your credit score, because it doesn’t,” at least in the short term, says Wilson. “By closing an old or unused card, you are essentially wiping away some of your available credit and thereby increasing your credit [utilization ratio].”
She recommends you check the total balances on all your credit cards and run the numbers before you decide to close one down. Use a credit score simulator tool like this one from Credit Karma or this one from Chase (for Chase customers) to estimate the damage to your score if you close a certain card.
The age of the card is also a major factor to consider, as closing a credit card with a long history or could drop your score by a few points. The effect could be more severe if your other cards are significantly younger than the card you’re looking to close. You can see the possible impact, again, by using one of the credit score simulator tools we linked to above.
“If it’s the oldest credit line and it’s closed your credit score will take a hit,” says Ossenfort. However, he says most can expect the dip to be minor and temporary, about 30 to 90 days.
Consider downgrading the card rather than closing it to avoid credit score damage
You may be able to preserve your rewards — and your credit limit — and simply ask your credit issuer you can downgrade to a card that doesn’t charge as high of an annual fee. If you can’t afford the $550 annual fee on the Chase Sapphire Reserve®, for example, you may choose to downgrade to the Chase Sapphire Preferred® Card, that charges a lower annual fee of $95.
Monitor the card for at least two months to avoid fees after closing
After you cancel the rewards card, Oliver recommends you keep an eye on the account for about two months, in case any fees are charged to the account after closing.
“A fee may have come between the closing of the billing cycle and when you closed the account,” says Oliver. This may be in the form of an interest charge for purchases made during your last month the card was open. You may have paid the balance down, but the interest won’t be charged to the card until the next billing cycle.
Part of that due diligence is getting it in writing that you’ve closed the account, in case you aren’t aware of any fees charged and it shows up later in collections.
You can ask the representative to send you an email or letter to your address confirming the account has been closed. If issues arise later, its best to try to resolve them directly with the creditor, says Oliver. But if that doesn’t work, you’ll already have the account closing in writing so that you can file a stronger dispute.
Unlink bills and autopay accounts
You don’t run into any hiccups with your bills, so you want to make sure the newly-canceled card account is no longer linked to any current bills.
Follow up on any of the accounts or bills the card was linked to and unlink the canceled card. While you’re there, don’t forget to update your billing information to a new card or alternative payment option.
Be firm with sales representatives if they try to keep your business
“That’s a lot of money on the table, and companies are understandably reluctant to lose it,” says Wilson.
If you’ve considered other credit options with the same card issuer ahead of time, prepare yourself by researching your options to know what’s available.
“They will try anything, including raising your credit limit, waiving annual fees and offering bonus points/miles to get you to stay,” says Wilson. She adds you may use the opportunity to negotiate better terms for your credit card — if they can’t make it worth your while, go ahead and walk away.
If the salesperson is particularly aggressive, advises Wilson, be firm and persistent. If they are particularly pushy, ask to speak with a supervisor. If they refuse, end the call, then call back and immediately ask to speak to a supervisor.
“It may take some persistence, but it can be done,” says Wilson.
The information related to Uber Visa Card, the Chase Sapphire Preferred® Card, the Chase Sapphire Reserve® and the Citi® Double Cash Card – 18 month BT offer has been independently collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.