I’ve heard many people say that they’d never pay an annual fee for a credit card. And I totally understand the logic behind this.
But as with most things in life, there are exceptions to the rule.
So, before you swear off annual fees for all of eternity, let’s take a look at why some credit cards charge these fees in the first place. After you see what annual fees cover, you might change your mind.
Credit Card Annual Fee Definition
Just so you’re clear about what an annual fee is, let’s start with a basic definition.
So, what are you paying for? The annual fee is like a cover charge you pay to get into a bar to enjoy the live entertainment. With a credit card, the fee gives you access to all the rewards, perks and benefits that come with the card.
The credit card might also come with a dazzling sign-up bonus. All of these rewards and bonuses are expensive. So credit card issuers charge annual fees to help recoup some of this expense.
If your credit card charges an annual fee, you’ll find the amount listed in the “Rates and Fees” box (sometimes, you’ll see it called “Pricing and Terms” or another variation), which is usually a link on the credit card’s homepage.
The amount of the fee varies by issuer and by credit card. Annual fees on credit cards can range from very low to hundreds of dollars. There are a few credit cards – the elite of the elite – that have annual fees in the thousands.
But for those of us who aren’t extremely wealthy, there’s no need to worry. If you have a great credit score, it’s easy to find an excellent rewards credit card that comes with a reasonable annual fee.
How Much Better Are the Rewards?
A rewards credit card, such as a cash back card, that comes with no annual fee can still offer you great savings on purchases. But the cards with an annual fee kick the rewards up by several notches.
For instance, a credit card that offers 3% cash back on groceries sounds pretty good, right? But add a reasonable annual fee to the mix, and maybe you’d get 6% cash back on groceries, plus a load of other rewards and perks.
With travel rewards and airline-branded cards, the rewards program can be quite exceptional, such as a $200 credit for in-flight purchases or getting your first checked bag for free. Some travel rewards cards go further and will even waive the first checked bag for a limited number of people in your party.
You could also get intangible benefits, such as priority boarding. I’m kind of petite, and I love being near the front of the line when it’s time to board. I just don’t like all the shoving and the dash for the overhead bins. As you can see, the intangible benefits are kind of personal, and only you can decide what’s worth paying for.
Is It Ever Worth It to Pay an Annual Fee?
There are credit cards that target those with bad credit. Often, these cards have annual fees. For example, a secured credit card might have an annual fee. But some secured cards don’t charge them, so do some research before choosing a card.
The annual fee for these cards helps reduce the financial risk for the issuer. If you’re trying to rebuild your credit and boost your score, then it’s usually worth a small annual fee. Just remember that you must also pay all your bills on time and keep low balances on your credit cards to increase your score.
Now, if it’s excellent rewards that you’re after, then you need to do the math and make sure your rewards exceed the cost of the annual fee. If you choose a credit card that offers the type of rewards you need, you might come out way ahead. But take time to research the rewards program as well as your own spending patterns before applying for a credit card with an annual fee.
One more thing to remember: Most rewards credit cards have higher interest rates. The credit card company knows that some cardholders are going to carry a balance and pay interest, so this is another way for the issuer to make money.
Don’t get a credit card with an annual fee if you think you’ll carry a balance. If you do, the cost of the credit card might very well outweigh the rewards.
Is a Credit Card Annual Fee Waiver Possible?
It might work outright, but you might receive an alternative offer for a statement credit or extra rewards. If the enhanced rewards are significant enough to offset most of the annual fee, consider that a win.
When Do You Pay the Annual Fee on a Credit Card?
Keep that in mind so you don’t use too much of your available credit. If you use more than 30% of your limit, your score can drop. But if your goal is to boost your credit score, then keep your balance to less than 10%. The reason? About 30% of your FICO score is credit use, so by keeping low balances, you’re putting yourself in a position to improve your credit score.
