There comes a time each year when you must decide whether to keep your cards. Each card has a different cardmember anniversary date, so this will likely happen multiple times per year.

You typically have three options when deciding what to do: keep, downgrade, or cancel. In this post, I’m going to break down different situations and suggest what to do.

 

Year One

The first year of having a credit card is when you receive a sign-up bonus (if applicable). Some people like to get a card only for the welcome bonus and then downgrade if they can. However, I strongly don’t recommend you do this. Sign-up bonuses exist because issuers believe that you will hold their card for at least one year.

American Express has rules stating that they can cancel your other accounts and take away your points if you cancel or downgrade a card before the 12-month mark. These rules are in place to prevent credit card “churning” and gaming.

 

Year Two (And Beyond)

At this point, you should have your card for at least 12 months and can decide its fate without getting in trouble with the issuer. The same questions apply if you’ve had your card for at least 24 months.

Question I: Does Your Card Have an Annual Fee?

Average age of accounts and account history must be considered here. These factors are two of the five that make up your FICO score. Therefore, closing an account without an annual fee could be damaging, especially if it’s an older account.

Generally, if your card has no annual fee, you should keep it open. Many people call seldom-used cards without annual fees “sock-drawer cards”. This is because people keep them at home hidden away instead of using them every day. I recommend using “sock-drawer cards” at least once every six months to keep them active. However, I prefer to use mine at least monthly to be safe.

Keep reading if your card has an annual fee…

Question II: Did You Receive Positive Expected Value Over the Last 12 Months?

Expected value is the total value you receive from a card’s perks plus any points earned on that card over a given time period. Add up the total amount of value that you received from your card. Subtract that number from the sum to the card’s annual fee. The difference is the expected value you received from your card.

You should keep your card if the difference is positive. However, you should keep reading if the difference is either $0 or a negative number.

For example, a cardholder named Bob received $500 in value in the first year of having a Chase World of Hyatt Card. Bob would need to subtract the $95 annual fee from the $500 in value to get his expected value. The difference is $405. Given the positive expected value, Bob should keep his card and pay the annual fee.

The term “long-term keeper card” comes from expected value calculations. Long-term keeper cards are unique in that the value of perks offered is always going to be more than the annual fee. It’s simply up to the cardholder to extract that value.

Question III: Are There Any Downgrade Options Available?

Your mileage may vary here, depending on your card’s issuer. There are many cards with annual fees that have no annual fee counterparts. But not every card does. You can either read PYCR or call your issuer to find out what downgrade options are available.

If the answer to the question in the header is “yes”, downgrade your card to a no annual fee version. You will preserve your account’s history and FICO score that way. One example of a card with downgrade options is the Citi Prestige. You can downgrade the Prestige to the no annual fee Citi Rewards + if you don’t get positive expected value.

If the answer is “no”, call your issuer to see if you can get a retention offer. Keep the card if you get an offer that’s at least as valuable as the annual fee. Otherwise, cancelling is the best option. An example of a card without a no annual fee downgrade option is the Chase Southwest Priority Card. You must either downgrade to a card with a lower fee (such as the Chase Southwest Plus Card) or cancel.

Exception: American Express

American Express is exceptional because of their Once Per Lifetime Rule. Part of this rule is that you can’t get the sign-up bonus for cards that are downgraded, upgraded, or product changed to. This eliminates most incentive to product change an Amex. The only other option is to cancel assuming a negative expected value.

For example, a cardholder named Jack has the American Express Delta Gold Card and he receives negative expected value. He can either downgrade to the Delta Blue Card, keep his current card, or cancel. If Jack decides to downgrade, he also decides to forgo the Blue Card’s sign-up bonus. Given these rules, Jack’s optimal strategy would be to cancel his Gold Card and then apply for another Delta card.

American Express charge cards are infamous for not having any no annual fee options to downgrade to. No annual fee charge cards don’t exist by design. Charge cards don’t charge interest because payments must be made in full each month. This feature leaves Amex with no way to make money other than swipe fees from merchants. Annual fees significantly help make up for the lack of interest.

The least expensive charge card is the Green Card ($95 per year), which is not useful in its current state. Therefore, if you’re getting negative expected value from a American Express Gold Card or Platinum Card, cancelling is your only option.

 

Final Draw

Downgrading a card is a great way to preserve your account history and FICO score. But its not always wise to do or even an option to begin with.

You must always wait until the 12-month mark for all cards before deciding. If the card in question has an annual fee, you must figure out if you’re getting positive expected value. Your mileage may vary as not everyone will receive positive expected value from a card that you might.

If you don’t receive positive expected value, check for any downgrade options that don’t have an annual fee. Downgrade if one exists and cancel otherwise. But if you have an Amex card, consider cancelling and then applying for a new card.