If you're paying a credit card annual fee to earn rewards toward flights, hotel stays or restaurant purchases, you may want to think twice. Those dollars you're shelling out each year could be more than you're getting back from your card, especially given COVID-19 and shifting hobbies and spending habits. Should you downgrade your credit card to one with a lower annual fee or no fee?

You might be tempted to cancel a card if the annual fee is more than you want to pay right now. But your credit score could take a hit, and downgrading is often the better option.

Before you do anything, understand what downgrading a credit card means, along with the pros and cons.

What Happens When You Downgrade a Credit Card?

Downgrading involves switching to a card from the same issuer within the same card portfolio that has either a lower annual fee or no annual fee but less attractive rewards and benefits. An example would be downgrading from The Platinum Card from American Express to an American Express Gold Card or an American Express Green Card.

"Most card issuers have other cards you can choose within the same family of cards," says Jim Miller, vice president of global banking and payments, J.D. Power.

When you downgrade a credit card, you keep the same account number and history with the credit card company. Usually, card issuers will do a soft credit inquiry that does not affect your score.

Card issuers won't offer sign-up bonuses if you downgrade. Those perks are generally reserved for new customers.

If you're downgrading your card because you're not using perks you're paying for, you will want to find out what will happen to unused rewards.

Say you have a Chase Sapphire Reserve card and downgrade to a Chase Sapphire Preferred Card, which charges a lower annual fee. You can keep your bonus points but will not earn as many rewards for future purchases, Miller says.

Some cards might not have downgrade options. In that case, you should contact your issuer to negotiate a lower annual fee or consider canceling the card.

Should You Downgrade a Credit Card?

You might decide to downgrade a credit card for many reasons, including:

• You are no longer using rewards from a premium credit card.
• The annual fee costs more than the benefits you receive.
• The credit card annual fee no longer fits into your budget.
• You are carrying several credit cards with annual fees and can no longer afford them.

"First, look at your spending habits and the type of rewards you're getting from the card to see if they align with your usage," says Frank Fantozzi, president and founder of Planned Financial Services in Cleveland.

Downgrading a credit card is a good idea if you know your annual fee exceeds the value of your rewards. You'll also need to make sure you've had your credit card for at least a year to qualify for a downgrade.

"There can be some restrictions, so check the terms," says Stephen Newland, owner and accredited financial counselor of Find Your Money Path, a Sandy Springs, Georgia, firm that helps people budget, pay off debt and manage money.

Your chances of qualifying for a downgrade are best if you have no card balance and you have a history with the card issuer. One caveat is that your issuer could take away any welcome or sign-up bonus earned if you downgrade.

Is Downgrading a Credit Card Better Than Canceling?

You might be tempted to cancel a card rather than downgrading, figuring it's one less card to worry about. But Fantozzi advises against doing so because it will affect your credit utilization ratio.

This is the percentage of available credit you're using. Canceling a card reduces your available credit, which increases your credit utilization ratio and can lower your credit score.

"Credit utilization accounts for 30% of your credit score," Fantozzi says. "If you downgrade, you don't impact credit utilization and you keep the same account history status."

Canceling a credit card, on the other hand, influences all of those financial factors. The effect depends on how many credit cards and how much available credit you have.

If you have a lot of both, canceling one credit card may not affect your utilization ratio or credit score much.

"I personally canceled two airline cards since COVID-19 to avoid paying the annual fees, which really weren't worth it," Miller says. "I have plenty of cards, so it was not worth holding on to them, and it didn't make enough of a difference in my credit score."

But if you have just a handful of credit cards, canceling one could have a bigger effect.

If you are concerned about either the effects of canceling your card or qualifying for downgrading, you could ask the card issuer to reduce the annual fee instead.

Says Newland: "The company has no obligation to say yes, but if you have a history with them and you are struggling, they are going to want to keep you as a customer and might be willing to give you a discount or waive the fee for one year."

How Can You Downgrade a Credit Card?

First reach out to customer service by phone or online to ask about downgrade options, restrictions and penalties. The answers will help you determine whether to proceed.

If you have an AmEx Platinum Card but want to downgrade to a Gold Card or Green Card, you will need to keep the card for at least 30 days. The downgrade process takes no more than two minutes, according to customer service.

Simply call AmEx, and you will be read a disclaimer about rewards and fees, and then you will receive your new downgraded card within 10 business days.

If you have a Chase Sapphire Preferred Card and want to downgrade, you won't be eligible until you have kept the card for at least one year. Chase says this is because you have paid the annual fee for the card when you receive it.

Look at your cards to make sure they suit your needs now, Miller says.

"In general, it's a good idea for customers to shop around their cards more often than they do," he says. "It might make sense to pay a smaller or no annual fee and get fewer air miles or less cash back rewards."

This article was originally published By Kristen Hampshire, creditcards.usnews.com.