One-Minute Money Hacks

Credit card annual fee too expensive? Here's how to downgrade it and avoid lowering your credit score

How to downgrade your credit card instead of closing it
How to downgrade your credit card instead of closing it

This story is part of CNBC Make It's One-Minute Money Hacks series, which provides easy, straightforward tips and tricks to help you understand your finances and take control of your money.

If your credit card annual fee is starting to feel like it's not worth your while, don't close the card: consider downgrading it instead.

Downgrading a credit card means switching to another card from your same issuer that has a lower fee, or none at all, usually in exchange for fewer points and rewards.

Closing a card can hurt your credit score because it lowers your credit limit, which in turn increases your credit utilization rate. Your utilization rate is one of the main factors used to determine your credit score: It shows what percentage of your credit limit you use and is used by lenders to measure your risk.

If you have $5,000 in available credit and you normally spend $1,000 on your card each month, that represents a credit utilization rate of 20%. Closing one of your cards and lowering that available credit to $3,000 would increase your utilization rate to 33% without changing your spending.

By downgrading a card instead of closing it, you can keep your overall line of credit intact while also avoiding the annual fee.

Downgrading is also preferable to closing a card because it means your account is still active. You can continue to grow your credit history, which can also help you increase your credit score.

Downgrading a card is typically an easy process. Simply call your card issuer's customer service department before your card's annual fee renews and tell the representative that you'd like to downgrade. They may try to offer you a points bonus to keep your existing card, but will downgrade if you ask.

Once your card is downgraded, check with your issuer to see if the card will be closed if you stop using it for an extended period of inactivity. If so, consider putting a small recurring expense on it — like a Netflix subscription — to keep the line of credit open.

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