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.
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?
- 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.
Let’s look at an example with several cards, so I can illuminate step 2, which is a bit tricky.
Imagine you have the following nine cards:
- Club Carlson Visa Signature
- Hyatt card
- Starwood Preferred Guest® Credit Card from American Express
- Sapphire Preferred
- Ink Bold
- US Airways Premier World MasterCard
- Barclaycard Arrival World MasterCard
- The Platinum Card® from American Express
- The Enhanced Business Gold Rewards Card® from American Express OPEN
The first step is to compare the retention bonus to the annual fee.
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.
The Sapphire Preferred offers a 7% points dividend at the end of the calendar year, which I think of as a retention bonus. The card has a $95 annual fee, and I value an Ultimate Reward at 2 cents, so the dividend would have to be 4,750 points for it to equal the annual fee. That means having earned almost 70k points on the card in one calendar year.
Beyond automatic retention bonuses, consider ones that will be offered if you ask for them. The Citi American Airlines cards are pretty famous for offering retention bonuses in terms of miles or statement credits. If you can get a retention bonus at least as big as your annual fee by asking, that’s a reason to keep a card.
Keep all the cards that have a big enough retention bonus. For all cards that don’t have a retention bonus as big as their annual fee, it’s on to step two.
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.
In step two, start with what you think your strongest card is and work down from there.
Going back to the nine-card example, Club Carlson and Hyatt are keeps and the other seven are still to be determined. Of the other seven, I think the most likely keep is the Ink Bold, so I’ll start there.
The big draw with the Ink Bold is its category bonuses, specifically 5x at office supply stores and on phone, internet, and cable bills. To my knowledge, those categories aren’t bonus categories of any other card. With the Ink Bold, one earns 5 Ultimate Rewards worth 2 cents each to me for a 10% rebate percentage on those purchases.
Compare that 10% rebate percentage to the next best alternative. At this point, we’ve only confirmed that you’re keeping the Hyatt and Club Carlson card. The Hyatt card would earn 1 point on those purchases that I value at 1.5 cents, and the Club Carlson card would earn 5 points that I value at 0.4 cents each. That means the Club Carlson card would be the best card left if you canceled the Ink Bold and it earns a 2% rebate percentage on these categories.
The Ink Bold does 8% better at office supply stores and on phone, internet, and cable bills. Figure out how much you think you’ll spend in those categories in the next year and multiply by 8%. If you plan to spend $1,200 on those categories (only $100 per month), you’re $96 better off spending that $1,200 on the Ink Bold than the Club Carlson card. The Ink Bold’s annual fee is $95. So that would mean you should keep the Ink Bold. And I haven’t even mentioned its 2x hotel category or lounge access yet, so this is a clear keep.
(Technically you should actually re-evaluate each card compared to every other card you decide to keep, meaning you wouldn’t know which cards you were keeping until the very end. For instance, later you might decide you should keep the SPG card, which has a better earning rate than the Club Carlson, lowering the marginal benefit of the 5x categories on the Ink Bold from 8% to 7.5%. If you love math, re-evaluate every card decision in terms of all the others. If close enough is good enough for you, then skip it and just keep what you’ve decided to keep.)
At this point, you’d be keeping the Hyatt, Club Carlson, and Ink Bold cards. You’d move to the next card. Let’s look at the Starwood Preferred Guest card.
The big benefit for the Starwood card is that one Starpoint is worth more than one of anything else, so it’s the best card for non-category bonuses. If you keep the card, you get 1 Starpoint per dollar on spending, and 1 Starpoint is worth 2.5 cents to me, so it has a 2.5% rebate percentage. If you cancel it, your next best alternative is the Ink Bold at 2%. Thus keeping the card means 0.5% extra value per dollar.
The annual fee is $65, so you’d have to be planning to put $13,000 on the card in one year to make this marginal benefit worth keeping the card to obtain. ($13k * 0.5% = $65)
If the extra 0.5% doesn’t get you all the way to justifying the $65 annual fee, you can look at other benefits like the category bonus on Starwood stays and the 2 stays/5 nights toward elite status that the card gives.
If the total marginal benefits equal $65 or more, keep the card. Otherwise ditch it.
Another interesting card, and one that will wide-ranging values from different people, is the AMEX Platinum. The main benefits for keeping the card are a $200 annual airline fee credit, lounge access, and SPG Gold status. For more information, see Get the Most Out of Your American Express Platinum Card. The annual fee is $450.
I think you can value the annual airline fee credit at $190 to $200, but the value of SPG Gold status and lounge access at most airports worldwide depends on how much you’ll use them. If you’re a heavy user of these perks, the $450 annual fee is easily justified. If not, the AMEX Platinum might not be the right card for you.
I won’t go through every card; I’ll just hope that the examples already provided have made it clear to think on the margin. Do not consider the total retail value of a benefit. Consider it’s actual benefit to you in light of other cards you have.
For instance, the Business Gold Card earns 3x Membership Rewards worth 2 cents each to me or a 6% rebate percentage on airfare. The Sapphire Preferred earns 2.14x Ultimate Rewards worth 2 cents each to me or 4.28% on airfare. When deciding whether to keep the Business Gold Card–if you have the Sapphire Preferred–then forget about 3x and multiply your expected airfare spending times 1.72%–the difference between airfare on the Business Gold Card and the Sapphire Preferred–to figure out the marginal benefit of holding the Business Gold Card.
Similarly the free US Airways Club certificate that comes annually from the US Airways card is worthless to someone with an AMEX Platinum, since Platinum card holders get access to US Airways’ clubs already.
I’ll list the rebate percentage that some popular category bonuses get below based on my valuations of the points involved. To figure out the marginal benefit of one card over another, subtract one card’s rebate percentage in that category from another’s.
- 10% — Ink Bold/Plus office supply, phone, cable, internet
- 6% — Gold Card airfare
- 5% — SPG card on SPG stays
- 4.5% — Hyatt card on Hyatt stays
- 4.28% — Sapphire Preferred travel/dining
- 4% — Ink Bold/Plus hotels
- 4% — Business Gold Card 2x categories
- 3% — Hyatt card on restaurants, airline tickets, car rental
- 2.71% — United Club card on everything
- 2.5% — SPG card on everything in 1x category
- 2.28% — Sapphire Preferred in 1x category
- 2.22% — Arrival card on everything
- 2.12% — British Airways card in 1.25x category (everything)
- 2% — Ultimate Rewards or Membership Rewards card in 1x category
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.