When you’re in the market for a new credit card, there are a few things you need to consider. For one, you’ll have to consider the interest rate the credit card provider will charge for any outstanding balance. You’ll also have to consider what percentage of the outstanding balance you’ll be required to pay as a minimum payment every month.
Another thing you should consider is whether the card has annual fees, and whether or not that makes sense for you. Typically when you opt for a card with an annual fee, you get some additional benefits and rewards in return.
These rewards can include anything from cash-back rewards to travel rewards and benefits, insurance, and several other credit card perks.
But does it make sense to get a card with an annual fee? And if so, when does it make sense? In this post, we’ll look at these questions in more detail.
What Is a Credit Card Annual Fee?
A credit card annual fee is a fee charged by a credit card issuer or provider that you have to pay to remain a cardholder. As the name implies, these fees are charged once a year, and in return for paying the fee, you get access to the rewards and benefits of the card.
How a Credit Card Annual Fee Works
Annual fees are typically charged once a year by a credit card provider. However, in some instances, the card issuer may charge the annual card fee in monthly installments. As long as you pay the annual fee, you’re entitled to be a cardholder and to the rewards and benefits of the card.
The annual fees charged by card issuers vary, and can be anywhere between $59 and $95 a year, although some premium cards charge upwards of $450.
These annual fees typically cover:
- Credit card perks. Although most credit cards come with benefits, many reward cards offer additional benefits to cardholders. These include things like price protection, extended warranties, and free FICO scores.
- Insurance and other protections. Many rewards credit cards include insurance and other protections as part of the benefits to cardholders. For example, travel credit cards typically include things like car rental cancellation or delay insurance (like in cases when an airline cancels a flight), as well as emergency travel assistance. Note that it’s always best to get clear guidance from the card provider on specifically what types of insurance the card offers.
- Membership in a rewards program. When you’re a member of a rewards program, you gain some benefit every time you use your card. For example, some credit cards offer a percentage of your spend back every time you use the card. So, in this example, if you charge a lot of expenses to your credit card, membership in the rewards program can help you offset the costs of the annual card fee.
The obvious question here is: why should you pay an annual fee for a certain card when other credit cards offer rewards but charge no fee? Generally speaking, cards with the most extensive benefits and rewards charge a fee. Therefore, if you want the best rewards and benefits, you’ll have to pay the annual fee.
Another important thing to note is that some cards offer the first year free and then charge the annual fee on each subsequent anniversary of you becoming a cardholder. Also note that if you cancel or downgrade your card within a certain time after paying the annual fee, some credit card providers may offer a refund on the fee, while other card providers may only pay back a pro-rata portion of the card fee.
Keep in mind that the terms and conditions of every card vary, so it’s always best to understand beforehand what you’ll pay, what you’ll get, and what the policies are.
Is It Worth Paying an Annual Fee for a Credit Card?
Now that you know what an annual fee for a credit card is and how it works, we’ll look at whether it’s worth paying an annual fee for a card. To do this, we’ll look at several factors you need to take into account to consider whether an annual fee is worth it.
When You Need to Build Credit
One of the primary reasons people opt for a credit card with an annual fee is because they have no other choice due to bad, limited, or non-existent credit. In such a case, it can be a good idea to opt for a card with an annual fee to help you build or rebuild your credit.
That said, there are a few cards focused on helping people with credit issues that don’t charge an annual fee. Not everyone is able to qualify for these cards, however, as they take into account income and financial history. If you don’t qualify but still need a card to build credit, then it might make sense for you to pay an annual card fee just to have access to a credit card, specifically in cases where:
- You don’t have a bank account. A few credit cards are specifically tailored to those without bank accounts or which forego a credit check. These cards are your best option if you don’t have good credit and probably wouldn’t qualify for other cards.
- You have fair credit. There are also some cards available for those with fair credit. In other words, this would make it possible for you to qualify for a card even if you don’t qualify for other rewards cards.
When You Want Better Cash-Back Rewards
It may be worth it to consider an annual fee to secure better cash-back rewards. Simply put, if you’ll get more rewards on a card but you have to pay an annual fee, it could be the right choice, depending on how much you spend. If the cash you earn back would outweigh the cost of the fee, then it would make sense to get the card.
Also, all rewards programs differ, so you may be able to get more rewards on certain categories of purchases compared to others. You’ll have to look at what you use your credit card for and at the specific rewards offered by the card to decide if the card is worth it for you.
For example, if you spend a lot on groceries on your credit card, it may be worth your while to look for a card that offers you cash back on your groceries. You could alternatively consider a card that offers a flat-rate cash-back reward on all your purchases. Typically, though, these cards have a higher annual fee compared to others, so take that into consideration.
When You Make Use of the Benefits
As we pointed out earlier, many credit cards offer different benefits to their cardholders, so it is important to consider what benefits you want from your card. Another very important thing to consider is whether you will actually use those benefits.
Think of it this way, would you buy a car just to park it in your garage and leave it there? The answer is probably no. Likewise, you shouldn’t spend extra on an annual fee when you won’t use the benefits the card offers. So, if you won’t use the benefits, it makes more sense to opt for a no-fee card which has far fewer rewards and benefits.
When You Offset the Fee With Spending Rewards
It’s no secret that credit cards with annual fees offer more spending rewards than those without fees, but that doesn’t mean they’re necessarily worth it. You have to consider how much you spend and what your rewards would be based on your spending habits.
The best way to explain this is by looking at an example. Say your current credit card does not require payment of an annual fee, but you receive 1% cash back on all purchases. Now consider another card that has an annual fee of $90 but provides 2% cash back on all your purchases.
If your average monthly spend on your credit card is $500, you’ll spend $6,000 a year and will earn $60 in cash-back rewards on your current card. Likewise, you’ll earn $120 in cash-back rewards on the new card, based on your average spend.
With the new card, your potential rewards are more than the annual fee, so it would make sense to get that card. However, if your average monthly spend is $300, then the picture changes a bit. In this case, your rewards will be less than the annual fee, while you’ll still earn $36 in cash-back rewards on your current card, so it wouldn’t make much sense to apply for the card with the fee.
Conclusion & Recommendations
When considering a credit card with an annual fee, you have to carefully look at your monthly spending and the rewards of the specific card, taking into account the annual fee. If the rewards offered by the card exceed the fee, then such a card may be worth your while.
But there are also other things you should consider. For one, you’ll have to consider your credit, as a card with an annual fee may be the only card you qualify for. You’ll also have to consider if you’d actually use the benefits and rewards offered by the card.
After taking everything into consideration, if you find that you’ll gain more than the cost of the fee, then a credit card with an annual fee may well be worth your while.
If you’d like to learn more about credit cards or other financial products, visit our website or contact us for more detail. At MoneyWizard, we provide easy-to-access resources and trusted providers that will have you investing with confidence, growing your wealth, and budgeting like a magician.