Avoiding your reward card’s annual fee

Dear Cashing In,

I hate paying credit card fees. But I love the bonus miles. Will my credit score be negatively impacted by canceling a frequent flyer credit card when the one-year anniversary is coming due, and with it the annual fee? This is not a long-standing card, nor a card that will have a balance (I pay my bills religiously).

Do I keep the card, pay the fee and just not use it? Or cancel? At the same time, are there negative consequences to opening too many cards, as in two a year and then canceling one or both or keeping them with no activity?

Finally, does checking my score with any of the agencies (TransUnion, etc.) negatively impact my score? Any thoughts on these things? Thanks very much! – Jonathan

Dear Jonathan,

You raise an important question. We all love to talk about the miles and points we earn and how we spend them for free trips and other goodies, but we don’t always pay attention to the actual costs of earning those miles.

If you pay annual fees, fail to pay your credit card bills on time or carry a balance, you will incur very real expenses that can cut dramatically into the value of your “free” trip.

Many of the best rewards credit cards waive annual fees for the first year as an incentive to sign up. The card companies then hope that you’ll either forget that the fee is coming up a year later, or that you’ll like the card so much that you won’t mind paying it.

That certainly can be true; some airline cards allow you to avoid baggage fees, for instance, so if you travel just a few times with bags, you’ll save more in baggage fees than you’d spend on a card’s annual fee.

Will closing a card affect your score?

Here, though, it sounds as if you’ve decided that the annual fee is not worth it to you, but you’re worried about the effect that canceling the card would have on your credit score. The short answer is, yes, canceling a card can ding your credit score because 30% of your FICO score is decided by your credit utilization ratio.

That’s the percentage of available credit you are currently using on all of your cards. If you cancel a card, you wipe away that particular credit line, your utilization ratio rises and your credit score dips temporarily.

It’s a minor concern, but closing it will also eventually cause you to lose some of your credit history. Credit history makes up 15% of your FICO score, but don’t worry much about this for another decade: Your history of good payments from closed accounts stays on your credit record for 10 years.

Checking your credit score does not hurt your credit, so never hesitate to monitor your credit.

There are ways to minimize the credit score impact of closing an account, but to avoid it completely, consider a couple of alternatives. First, you can always ask the card issuer to waive the fee for another year. Sometimes this works, sometimes it doesn’t. It depends on the issuer and on your history with them.

However, there’s reason to be optimistic about your chances of success. According to a 2018 CreditCards.com poll, more than 80% of cardholders who asked got a late fee waived.

If you can’t get the fee waived, you might consider downgrading to a card that has no annual fee. Most issuers have no-annual-fee reward cards, and they would prefer to keep you as a customer.

I did this once. Faced with a $95 annual fee on my Citi® Premier Card, which at the time had been waived the first year, I called Citi and asked to switch to the Citi ThankYou Preferred Card, which had no annual fee (this card is no longer available).

In downgrading, you can typically keep your credit limit the same as on your old card. The perks won’t be as great and you probably won’t get a sign-up bonus as you might with a completely new card, but you avoid a negative effect on your credit.

Before you downgrade or cancel a card, make sure that you don’t lose your points or miles. This is especially true of bank-operated reward programs. If the miles are already in a frequent flyer account, they’re probably safe, even if you cancel a card, but if the bank controls the points, you could lose them if you cancel the card.

My wife learned this the hard way two years ago when she canceled her Capital One Venture Rewards Credit Card to avoid the $95 annual fee without realizing that she would forfeit about 9,000 Capital One miles, worth $90 in travel expenses.

When she called back 30 minutes later, she was told there was nothing she could do: They were gone forever. Neither of us will be making that mistake again.