Downgrading Credit Cards for More Efficient Points and Miles Accumulation
When credit card issuers ask you to step up, it may be advantageous to step back.
In the past few months, some clients and friends have received offers from their credit card issuers to upgrade their credit cards to cards offering more benefits along with, of course, higher annual fees. This is obviously a good move for the credit card issuers. They are asking people with $100 annual fee cards to step up to a card with an annual fee of $200 to $300. Cardholders with these mid-level cards are being offered an opportunity to move up to premium cards with annual fees surpassing $500.
In most of the cases brought to my attention, I could NOT see any significant benefit of taking the upgrade. And in some cases, the upgrades could actually harm the client’s strategy for accumulating points and miles leaving them with higher card fees and fewer points or miles to show for their routine credit card spending.
But this post is not really about upgrading your credit cards. It is about the possibility that you should sometimes
downgrade a credit card when it is to your advantage. After all, just as there are cases where there is little or nothing to gain from upgrading, there can also be cases where there is little or nothing to lose from downgrading. Understandably, you won’t be getting mail pieces or emails from your credit card issuer offering you an opportunity to downgrade. The topic of downgrading comes up from time to time in other points and miles blogs but, there is more emphasis on upgrades. This is no surprise since many points and miles blogs rely on advertising from card issuers as well as collecting fees when you sign up for a credit card through links they provide. (TRO does not accept advertising and has no relationship with credit card issuers.)
Why Downgrade a Credit Card
The bottom-line reason for downgrading a credit card to a less expensive card in its family is that the cardholder is simply not getting good value for the annual fee that they are paying. A downgrade can quickly save you hundreds of dollars in annual fees. Reasons that you are no longer getting good value might include:
- You no longer use the benefits and credits, or you use them less frequently.
- The issuer changes or reduces benefits so that they no longer resemble what you originally signed up for.
- Your spending patterns have changed so the card’s bonus structure is less beneficial.
- You learn that points accrual will be similar or even better with a downgraded card.
- The annual fee has increased but any promised new “enhancements” are of no benefit to you.
When to Downgrade
Usually, you cannot downgrade a credit card until you have held it for at least one year.
- There is no point in downgrading before the year is up anyway as you have already paid the annual fee and can still take advantage of any benefits.
- In cases where the annual fee was waived for the first year, the issuing bank will probably not be keen to offer a downgrade before you have paid your first annual fee. In fact, if you were to try to cancel the card or seek a downgrade to a no fee card, the bank might try to “claw back” any sign-up bonus you received. Furthermore, they might be hesitant to issue you cards in the future.
- Also, if you are planning to get a new card from an issuer in the near future, it is probably not a good idea to ask for a downgrade of one of their current cards and they might see you as a less desirable (i.e. less profitable) customer and be less inclined to approve your application.
You should downgrade around the time that your annual fee is about to be renewed. First, you might as well take advantage of any benefits or credits for the full year. Second, if you have decided to downgrade, you want to get that done before the renewal fee kicks in. Typically, after renewal fees appear on your statement, you have a brief grace period to drop or downgrade a card and avoid the new annual fee, but policies can vary from bank to bank.
How to Downgrade
Downgrades require a call to a card issuer’s customer service.
- If you have been a good customer, they might try to keep you with your current card by offering some incentive which might or might not be compelling enough for you to stay put.
- In some cases, perhaps if you have not used their card very much, they might not approve a downgrade even if they have a lower tier product. In that case, you need to decide if you want to keep the card for another year or cancel it.
- Don’t forget that the downgrade also affects any authorized users who hold the card so you need to alert them to changes.
Why Not Just Cancel the Card
A common myth of credit cards and credit ratings is that cancelling a card will improve your FICO score. However, a huge component of your credit score (perhaps one-third) is your credit utilization rate (i.e., the percentage of all your available credit that you are using at a given time). The credit rating agencies and banks like to see a low percentage. Let’s say you tend to put $4,000 per month on credit cards and have a total credit line (from all sources) of $40,000. Your utilization is 10%. Now, imagine that you cancel a card with a $16,000 credit limit. Your total credit now drops to $24,000 and your utilization would increase to about 17% ($4,000/$24,000) which will have an impact on your FICO score.
By downgrading, you maintain the credit limit and your relationship with the bank. Maintaining the relationship with the bank is important because you want your ongoing pursuit of travel rewards to be sustainable. You may be interested in other products offered by that bank in the future or even upgrading back to the card you moved away from.
Potential Pitfalls of Downgrading
Obviously, you will lose certain benefits with a downgrade. If your current card benefits include credits for certain expenditures, it makes sense to take advantage of them before a downgrade. As an example, some cards will cover the application fee for Global Entry or TSA PreCheck so you could apply for these or cover the application fee of a family member or friend if you already have this.
Another concern is the fate of flexible points that you have accumulated. For most card families, you need a card with an annual fee to transfer points to airline and hotel partners. If you are downgrading to a free card, you might lose that capability. For example, if you have a Chase Sapphire Preferred card ($95/year) you can transfer Chase Ultimate Rewards points to partner loyalty programs. But, if you downgrade to one of the Chase Freedom no fee cards, you are limited in how you use the points and they tend to be worth less. In this case, if you were downgrading to a free card, you might want to proactively transfer points where they would be most useful before you lose the opportunity.
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When we create a Travel Rewards Optimizer plan for you, we often recommend that you apply for cards with annual fees.
- Generally, the best benefits and accumulation of points and miles tend to go hand in hand with cards that have fees.
- When we recommend these cards, our plans are designed to ensure that the travel value you receive will pay for the higher fees many times over.
- But, at the same time, we also look for opportunities for you to strategically downgrade cards when we learn that pricier cards are less efficient for point and mile accumulation, offer redundant benefits, or offer benefits that don’t justify the additional costs. That’s optimization.
In the next few weeks, our posts will take a closer look at some of the credit card “families” and what this might mean for upgrading and downgrading. We hope you will check them out.
We are ready to help you turn your routine credit card spending into the travel of your dreams.
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E-mail: frank@travelrewardsoptimizer.com
DISCLAIMER: I am not an investment advisor, financial planner, tax professional or legal professional. The projections provided in my plans are based on good faith estimates and client supplied information. I can not guarantee that credit card issuers will approve the applications of my clients. Credit card offers, loyalty program policies, and bank policies are subject to change over time.