6 things to consider before closing a credit card with an annual fee

Make sure the perks are worth the payment. (iStock)

The current economic uncertainty has many of us looking for ways to tighten our personal finances. This writer recently received a statement for a travel rewards credit card obtained last year to take advantage of a $175 signup bonus on a flight. Twelve months later, a bill arrived for the $99 annual fees.

Card issuers often waive the annual fee for the first year, but when the statement arrives on your anniversary with the cost included, it's time to decide if it's worth it. Before you choose to keep or cancel it, ask yourself a few questions:

1. Do cashback rewards pay for the cost?

Cards that charge an annual fee offer valuable perks in exchange for the cost, such as a higher percentage for cashback rewards and discounts. Credible can help you easily compare cash back credit cards so you're maximizing your money every time you swipe. See how much you could save on everyday purchases now.

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Look at your statements and add up the savings to determine if the reward justifies the price. Then compare it to the annual fee. For example, the Blue Cash Preferred Card from American Express offers six percent cash back on groceries, up to $6,000 per year in purchases. If you spend the maximum each year, it calculates to a $360 savings. In this case, it might be worth the $95 annual fee.

2. Do you take advantage of the perks?

In addition to cashback rewards, some cards provide credit card benefits. Use Credible's free online tools to see what kind of rewards card makes the most sense for you.

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For example, one travel card offered a free checked bag, early boarding privileges, membership to their airport lounges and the ability to earn free flights with points accumulated from spending. If the user was a frequent traveler, this could be a great deal. Many airlines charge $25 or more to check a bag and enjoying the free food at the lounge beats airport prices on snacks or meals.

3. Are there free cards that offer similar rewards?

These days it’s relatively easy to find credit cards that don’t have annual fees. You may decide to get a second card. Citi Double Cash Card offers two percent back on purchases for no annual fee if you are interested in cashback rewards. Take some time and compare offers to find the best option for you.

In the end, this writer decided to cancel the credit card. Flying only once or twice a year, and probably not at all with COVID-19, this made sense. It was a pleasant surprise, then, when they offered to credit back the fee before they canceled the card. Your mileage may vary, though, so explore your options and weigh the benefits to make the best decision for your circumstances.

4. Will canceling the card hurt my credit score?

Closing a credit card impacts your credit utilization ratio, which is the amount of credit you're currently using in revolving accounts divided by the total amount available. When you close a credit card, your available amount decreases, and your credit utilization could increase, and that can hurt your credit score. Your credit utilization rate makes up about 30 percent of your credit score. To lessen the impact, you can pay down balances on other cards. Also, the average length of your credit history accounts for about 15 percent of your credit score. If the card is one you've had for a long time, you could negatively shorten your credit history by closing it.

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5. Does the credit card issuer have a retention offer?

Credit card issuers will want to keep good customers, and they may offer you a bonus to entice you to keep the card. For example, the issuer may give you extra points that are the equivalent of the annual fee. Or they may offer to waive the annual fee. If you call and are polite, you might be surprised by what they offer to avoid closing the account. You won’t know unless you ask.

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6. What will happen to my rewards?

If you’ve accumulated points that you can redeem later, you'll want to know what will happen to them. Closing your card may mean you forfeit the ability to use them in the future. It could be a good idea to use your rewards before closing the card. Or ask if the card issuer has other credit card offers. You may be able to downgrade your account to one of their free credit card products and retain your rewards. If you do transfer to a new card, this could eliminate the negative impact on your credit utilization and credit score.