Score Sign-Up Bonuses, Avoid Annual Fees & Boost Your Credit Score
Read Time: 7 Minutes
Today we’re talking about strategically downgrading your credit card. We’ll cover what exactly a downgrade is, 3 situations it can make sense, and things to be aware of. This trick only takes about 5 minutes to do, but can reap you serious rewards.
If I had learned this easy credit card hack sooner in life, I would be miles ahead of where I am today (forgive the cheesy airline miles pun). But seriously, I’d have more travel miles, a higher credit score, and would have avoided $100s in annual fees.
Let’s get to it.
What is a Credit Card Downgrade?
Downgrading your credit card is a way to switch from your current card to a different card by the same issuer (ie from one Chase card to another). The technical term for this is a “product change” and can be done by simply calling the customer support team for your credit card issuer.
Credit card companies offer this as a way to keep your business. If a certain card no longer makes sense for your personal situation, many people will seek to cancel the card. Instead, the company can allow you to product change to another card in their lineup that better meets your needs. They are happy because they keep you as a customer, and you are happy because you have a more useful credit card. Win-win.
Top 3 Reasons to Downgrade
But when does downgrading your card make sense? Is it better than simply canceling the card? Most of the time downgrading is much better than cancelling!
Here are the top 3 reasons I have downgraded credit cards in the past, and some real-world examples (as of the date of this article posting) of cards you can do this with as well.
1. Avoid Annual Fee
Annual fee credit cards can have great perks, but only if they match your lifestyle. Things happen, and life changes, so a card that used to make sense may no longer suit your needs. When that happens, you can find yourself in a conundrum. Luckily, downgrading your credit can be a great option to help you avoid an annual fee.
A great example of this is the Citi Prestige® Credit Card. If you are a frequent traveler, this is one of the best cards on the market right now. It has a $450 annual fee, but comes with a $250 air travel credit, free Priority Pass™ membership, and a free hotel night when you book 4+ nights.
But let’s say you change jobs, have a kid, or any other reason that prevents you from travelling as much as you used to. Now, that $450 may no longer be worth it. Luckily, you can downgrade to a Citi® Double Cash Card. This card has no annual fee, and essentially earns you 2% cash back on every dollar you spend (1% when you make the purchase, and another 1% when you pay off your card). You’ll lose out on some of the travel perks, but have a free card that offers great cash back and better matches your current needs.
This is of course just one example of how downgrading your current card can help you avoid an unnecessary annual fee. There are plenty of other high-fee cards out there. If you have 1 in your wallet, see if downgrading can help you too.
2. Boost Credit Score
Another reason why downgrading a credit card is usually preferable to cancelling one is to boost your credit score. Even though a cancelled credit card will usually stay on your credit report for 7-10 years, closing it can still impact your credit score.
- Maintains Credit Utilization Ratio: Credit utilization accounts for 30% of your FICO® score. When you close an account, it lowers your amount of available credit. So even if your spending stays the same, your utilization ratio will increase. In general, the higher your utilization ratio, the lower your score. Instead, downgrading a card maintains your credit limit, and thus helps your utilization ratio and your credit score.
- Keep Average Length of Account: Length of credit history accounts for 15% of your FICO® score. When you close an account, especially one you’ve had for a long time, it can lower your credit history. Instead, downgrading a card maintains your credit history, and thus helps your average length of accounts.
- Avoid Hard Inquiries: New credit accounts for 10% of your FICO® score. Applying for a new credit card results in a hard inquiry on your credit report, which usually decreases your credit score. Instead, you can downgrade your card, which usually does not cause a hard inquiry. This allows you to get a new card without negatively impacting your credit score.
A good example of this is downgrading your American Express Platinum Card® to an American Express® Green Card. The AmEx Platinum is another great travel card, but it has a whopping $550 annual fee. If, for whatever reason, the card no longer works for you, one option is to cancel it. But another option is to downgrade it to the AmEx Green. Your annual fee would drop from $550 down to $95, and you get to keep your account history and credit limit.
3. Risk-Free Signup Bonus
The 3rd reason to downgrade your credit card is to score lucrative signup bonuses without getting stuck in a high-fee card. Many times, a card’s signup bonus in year 1 is more than enough to offset a high annual fee. However, in year 2 and beyond, the math may not work out in your favor.
A good example of this is the Chase Sapphire Reserve. Currently it has a 50,000 point signup bonus. I’ve written another article on why I have this card and plan to keep it, even after year 1, but my situation may be different than yours. After the signup bonus is gone, it may be hard for you to justify keeping the card. Does that mean you shouldn’t apply for the Chase Sapphire Reserve at all?
Of course not! Apply for the card, get your 50,000 points, and enjoy your 1st year. After the year is up, you can decide for yourself if you want to keep it, or downgrade it to a Chase Freedom Unlimited® Card. You aren’t committed to keeping the Reserve since you can always change your mind after the 1st year.
And the Reserve isn’t the only card with a hefty signup bonus. These bonuses are a huge way credit card companies entice new customers onto their platform. Keep a look out for big bonuses, but don’t forget to make sure there is a downgrade option.
Things to be Aware of
Now you know 3 ways strategically downgrading your card can benefit you. But, as always, there are some things to keep in mind. The list below is not comprehensive, but covers some of the main ones.
- Use your points before downgrading: Different companies have different rules, but some will take away any unused points when you downgrade. There are many factors such as how long you’ve had the card before you downgrade and which card you change to. So do your homework, but a good rule of thumb is to use your points before downgrading.
- Know your downgrade options before you apply: When you call in to downgrade your card, you don’t get to pick from any card that issuer has. Most of the time there is a small subset of cards you can choose to downgrade to. Depending on your downgrade options, you may decide it’s worth it or not. So make sure you know your options before you apply for that expensive card.
- No double dipping signup bonuses: Lastly, if you downgrade to a card that also has a signup bonus, too bad. You don’t get to double dip. Signup bonuses are usually only for brand new customers. Since, by definition, you are already a customer if you downgrade, that means no signup bonus on the 2nd card.
Wrapping It All Up
I’m a huge fan of strategically downgrading your credit card when it makes sense. This strategy is almost always better than cancelling your credit card. Using this technique, I’ve been able to avoid annual fees, keep my credit score high, and score big signup bonuses. Yes, it takes a little bit of research, but it is well worth it.
Tell me in the comments if you’ve used this technique before or if you plan to after reading this.
The conclusions drawn throughout this website are not advice meeting the particular investment needs of any investor, and they are not intended to serve as the basis for financial planning, tax, or investment decisions. This website is for informational purposes only and is not a solicitation or an offer to buy any product, service, security or instrument. The opinions expressed throughout this website are my own and not those of any company I work for.