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Understanding Credit Card Annual Fees and Making the Best Decision

At O1ne Mortgage, we prioritize consumer credit and finance education. This post aims to provide an objective view to help you make the best decisions regarding credit card annual fees. For any mortgage-related needs, feel free to call us at 213-732-3074.

How a Credit Card Annual Fee Works

Credit card annual fees are typically found on premium rewards cards, travel cards, and secured cards. Some issuers may waive the fee for the first year to attract new cardholders. Generally, you will pay the fee when you first open your account and on each anniversary of your account opening. The fee may be added to your account’s balance immediately, so even if you don’t use your card for purchases, ensure you pay your bill on time to avoid late payment fees.

When You Should Keep a Credit Card With an Annual Fee

Paying an annual fee might be worth it if you’re earning substantial rewards, enjoying cardholder benefits, or getting other value from the card. Here are some scenarios where keeping the card makes sense:

• Offsetting the annual fee with rewards: Estimate your annual rewards earnings and compare them to a no-annual-fee card. If the difference exceeds the annual fee, it might be worth keeping the card.
• Utilizing cardholder benefits: Benefits like airport lounge access, free hotel room certificates, primary rental car coverage, free checked bags, and statement credits can justify the annual fee if used frequently.
• Using an intro 0% APR offer: If you opened the card for an introductory purchase or balance transfer 0% APR offer, you might need to keep the card open while paying off the balance.

When You Should Cancel a Credit Card With an Annual Fee

If you’re not getting much value from the card anymore, closing it might be a better option. Consider the following:

• Reducing mental energy: Cards with annual fees often require more management. A flat-rate cash back card without an annual fee could be simpler.
• Low rewards earnings: If the rewards are not significantly higher than those from no-annual-fee cards, it might not be worth the fee.
• Rarely using benefits: If the card’s benefits no longer align with your lifestyle or travel habits, it might be time to cancel.
• Changes in benefits or reward programs: If the card’s benefits or rewards program has changed, it might not be as valuable as before.

Consider Downgrading Your Credit Card Instead of Canceling It

Downgrading to a card with fewer benefits and lower fees can be a good alternative to canceling. This option has several advantages:

• No impact on your credit score: Switching cards without closing your account generally won’t affect your credit score.
• Retaining rewards: You might be able to keep your rewards by downgrading to another card within the same rewards program.

However, you might not keep promotional APR offers, and product changes aren’t always available. Call your card issuer to discuss your options.

How Canceling a Credit Card Affects Your Credit

Closing a credit card can impact your credit scores by changing your credit utilization ratio and credit mix, and it may affect the average age of your accounts in the future:

• Higher credit utilization: Closing a card decreases your available credit, which can increase your utilization ratio and hurt your scores.
• Fewer revolving accounts: A mix of open revolving and installment accounts can help your scores. Closing your only credit card might reduce your credit mix.
• Average age of accounts: Closed accounts can stay on your report for up to 10 years, but once they fall off, the average age of your accounts may decrease, potentially hurting your scores.

Keeping credit cards open is generally better for your credit scores. Downgrading or asking for a fee waiver might be a good first step. However, if saving money on annual fees is a priority, the impact on your credit could be minimal if you have other low-balance credit cards or plan to open a new one soon.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make informed financial decisions.

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