This is the twenty-eighth post in a monthlong series that started here. Each post will take about two minutes to read and may include an action item that takes the reader another two minutes to complete. I am writing this for an audience of people who know nothing about frequent flyer miles, and my goal is that by the end, you know enough to fly for free anywhere you want to go.
Most travel credit cards have an annual fee. One of the main questions people email me to ask is whether they should cancel one of their rewards cards before the next annual fee.
Whether you got a card from my list of top current credit cards or from a personalized suggestion during a Free Credit Card Consultation, eventually you’ll probably wonder whether the card is worth keeping through its next annual fee.
I’ll lay out the two-step process you should use to determine which cards to keep and which to cancel.
How do I approach the decision of whether to keep or cancel a card?
I start by asking two questions:
- Are you getting a retention bonus for keeping the card that is worth more than the annual fee? If so, keep the card. If not, go to step 2.
- Are the marginal benefits of holding the card larger than the annual fee. If so, keep it. If not, cancel it.
Both steps come down to future-looking value. The annual fee is a cost, and you need to get a benefit at least as big as that cost from keeping the card.
The first step is to compare the retention bonus to the annual fee.
Some cards have an automatic retention bonus.
The Club Carlson card offers a 40k point retention bonus and a $75 annual fee. If you value a Club Carlson point above 0.19 cents, you should keep the card. (They’re worth more like 0.4 cents.)
The Hyatt card offers a retention bonus of a free night at a Category 1-4 property and continued Platinum status, again with a $75 fee. That also seems like a no-brainer to hold if you’ll need a hotel stay any time in the next year.
Offered upon Calling to Cancel
Other times, you’ll get offered a retention bonus if you call to cancel your card.
Sometimes the offer is a waiver of your annual fee. In this case, of course keep the card.
Sometimes the offer is a number of points or miles. In this case, figure out the value of the offer. If it is more than the annual fee, keep the card. If it is less, then move to step 2 below, keeping in mind the value of these points as a partial offset of the annual fee.
Sometimes the offer is a higher earning rate on the card for a period of time like 2x miles on all purchases for six months. This is the hardest to value because you have to figure out how much spending this will incentivize you to put on the card and how much the extra miles are worth. If the extra miles are worth more than the annual fee, keep the card. If they are worth less, then move to step 2 below, keeping in mind the value of these extra miles as a partial offset of the annual fee.
Marginal Benefits of Holding the Card
The second step is to compare the marginal benefits of keeping a card to its annual fee.
The benefits of keeping a card might include:
- lounge access
- free checked bags
- category bonuses
The operative word “marginal” mainly comes into play on category bonuses. You have to determine how much extra value you get from using a card’s category bonuses compared to your next best option if you canceled the card.
When you are looking at the card you need to keep or cancel, compare it to the other cards you have.
For instance, imagine that you have a brand new Citi ThankYou® Premier Card and an older Barclaycard Arrival PlusTM World Elite MasterCard® that you need to decide whether to keep or cancel.
The big draw of the Barclaycard Arrival PlusTM World Elite MasterCard® is that you earn 2 miles per dollar on all purchases. The miles can be used toward any flight, hotel, car rental, cruise or travel expense at a value of 1.075 cents each.
That means you earn 2.15% back on all purchases.
Compare that 2.15% rebate percentage to the Citi ThankYou® Premier Card, which earns 1 point per dollar on most spending, 3 points per dollar on travel and gas, and 2 points per dollar on dining and entertainment. Because of the new ThankYou Points transfer partners, I’d value ThankYou Points at 1.8 cents each.
In a 1x category, that makes the rebate percentage of the Citi ThankYou® Premier Rewards Card 1.8%.
The Arrival Plus does 0.35% better on spending when the ThankYou Premier doesn’t have a bonus category. Figure out how much you think you’ll spend in non-bonused categories in the next year and multiply by 0.35%. If you plan to spend $15,000 on those categories (only $1,250 per month), you’re $52.50 better off spending that $15,000 on the Arrival Plus than the ThankYou Premier. The annual fee on the Arrival Plus is $95 (waived the first year.) So that would mean you should cancel the Arrival Plus.
Applicability to You
Only you know your spending patterns and how much you use the non-category-bonus benefits of your cards, so only you can decide whether to keep a card or cancel it.
The decision process is a pretty simple math problem where you add up the benefits of keeping the card and subtract the annual fee.
As you might imagine, cards you use a lot will come out well in the keep-cancel analysis, and cards with a retention bonus will too.
Cards that do poorly are airline cards because they don’t offer good category bonuses, and their 1x return is always worse than the SPG card or Ultimate Rewards-earning cards.
Also the more total money you spend on all your credit cards, the more annual fees you will be able to justify to maximize category bonuses. If you spend less money, the optimal number of cards to carry will be lower.
The idea is simple. Compare the marginal benefit of carrying a card for the next year to its annual fee. If the benefit is greater than the fee, keep it. If the fee is greater than the benefit, cancel it.
The trick comes in calculating the marginal benefit which requires valuing a cards’ perks, valuing each type of mile and point, and calculating how much spending you’ll do in various categories.