The other day, a reader named Annie wrote in to ask me for advice on dealing with a new annual fee on her Capital One credit card account. She wrote:
What’s your take on Capital One’s new policy of an annual fee for existing cardholders? This is my oldest card, and I don’t want to close it because it will cause my credit score to drop, but a $60/year fee is insane.
While I’m not in the business of giving specific advice, I can provide some general feedback here. For starters, I agree that a $60 annual fee seems excessive. That being said, I do have a card with a $150 annual fee.
I know what you’re thinking… $150? Are you crazy? No, not really. The card in question is the Amex Delta Platinum SkyMiles card, and I more than make that fee back in the form of free checked bags and bonus MQM miles which, unlike regular reward miles, count toward frequent flyer status upgrades.
Anyway, I digress. The point here is that there are rare instances in which I’m willing to tolerate an annual fee, but only if the benefits outweigh the cost.
Assuming that you don’t want to pay the annual fee, however, is it safe to close the account? Annie is right that doing so might have a negative impact on her credit score, but will it really be a big deal?
I’ve talked in the past about how your FICO credit score is determined, but here’s a quick refresher… There are five major components of your credit score. In order of importance, they are:
Payment History – 35%
Amounts Owed – 30%
Length of Credit History – 15%
New Credit – 10%
Types of Credit Used – 10%
By closing a long-standing credit card account-best rewards credit card, you’re primarily affecting the length of your credit history, which is a relatively minor component of your credit score.
If you replace this card with a new one, you’ll also take a small hit in the “new credit” category. Here again, this is a minor component of your overall score.
Even though these two categories account for somewhere in the neighborhood of 25% of your credit score, closing an account and opening another won’t decimate them, so we’re probably only talking about a handful of points.
In other words… If it were me, I wouldn’t get too caught up in worrying about the effects on my credit score. Rather, I’d decide the best course of action based on the value I’m receiving from the card in question, and make a decision from there.
11 Responses to “Credit Card Annual Fees: Should You Close Your Account?”
personal word from a guy who works at Capital One, if the account is closed within 30 days of the fee posting it will automatically be credited back to the account AND you have 90 days to pay off the remaining balance( if on the 91st day there is still a balance the fee will repost) also most of the time they can remove the fee but thats only AFTER it posts before then there is nothing anyone could do
I received a letter in the mail in regards to a Capital One card I opened when I was 19 (I’m a hair under 25 now) that has had maybe three purchases on it since I opened it, and has sat at a $0 balance for almost all of that time. They wanted a $60/yr fee and an interest rate hike.
This, after dropping my credit line from $1200 to $500 two years ago after two years of idle balance at $0.
I happily declined the new terms and cut up the card… which I had to go digging in the safe for.
What’s in my wallet? Not Capital One!
I saw this article appeared on Military.com site. If Annie was in military I would suggest she look at USAA’s credit cards..USAA has opened up there membership to all service personnal and all veterans (honorably discharged a proviso also.
In my opinion a solid company.
I have successfully converted a card from another bank. I have changed affiliated programs and fees, yet kept the same card number. If they don’t waive your fee and you don’t wish to pay it, an option is to ask if you current card can be switched to a no-fee program.
I think your advice is right on. Everyone should really review their situation before making decisions. While in most cases, closing the card will only result in a small hit on their credit score, it is a hit nonetheless and if you are in the middle of purchasing a home, for example, that hit could bump up your mortgage interest rate.
You probably won’t need to close the account. Just call them after you see the fee appear on you statement and tell them you’re going to cancel because of it, and they’ll almost definitely offer a refund.
I have a Capital One card and that’s what I’ve always done, and I have never had to pay the annual fee.
Costco members can get an Amex rewards card without an annual fee.
My oldest card also started charging an annual fee. ($45, in my case). I called up and cancelled, but since I wasn’t planning any big purchases, I was ok with the score hit.
It ended up only dropping a few points, which I’ve gotten back, plus some in the past 4 months. The only reason I think it dropped was because it bumped my credit/debt ratio back up to close to 30% (I’m paying off debt but that card was paid off a while ago).
I was told that the fee could be waived on a yearly basis (call every year, they’ll waive it). I was unhappy with that bank for other issues, so I cancelled anyhow, but it might work for you, as pp Jacob noted.
Floridian: I don’t know if this is across the board. It might only apply to certain customers and/or cards.
Capital One has an annual fee now? Oh crap, I have the rewards card, but don’t spend enough (i.e. get enough rewards) to justify a $60 annual fee….
time to go make a phone call to see if this is true…if so, Capital One card will be closed and the “back up” card will become our main card.
My first credit card had an annual fee, I knew that going in. I paid the first year, but every year after that I called to say I was going to cancel because of the fee. They always waived it and I went on my merry way.