The Benefits of No Annual Fee Credit Cards

Any no annual fee card has the potential to help boost your credit. Here’s how:

• Build your credit. Assuming you pay your full balance on time each month, having a card and using it will boost your credit score. Experts note that using these cards to prove you are a responsible borrower generally makes it easier to then get approved for premium cards that offer richer rewards.⁴ People with better credit scores typically qualify for auto loans and mortgages with lower interest rates, too.
• Reduce your credit utilization. Your utilization – how much of your available credit you’ve used – counts for 30% of your FICO® score.⁵ Suppose your only card is one that you used for a balance transfer or to make a large purchase, and your balance is 50% of the card’s limit. Opening a no annual fee credit card can lower your utilization, which will then be based on the average of the two cards. Experts recommend keeping utilization at or below 30%.⁶
• Increase the average age of your accounts. You won’t see this benefit right away. But if you open a no annual fee credit card and hang on to it, it will gradually contribute to the portion of your credit score that reflects credit history.

It’s worth pointing out that with no annual fee credit cards, you’re not going to risk much in return for these potential benefits to your credit score. If you get a no-annual-fee card and don’t use it, what does it cost you? Exactly. Nothing. So, there’s no need to justify keeping the card. Plus, no annual fee credit cards are typically easier to get than many other cards. For more, read “Comparing Annual vs. No Annual Fee Credit Cards.”

Beyond these broader benefits to your credit score, no annual fee credit cards can help you manage your money in other ways, too. And since different credit cards offer different incentives, rewards, and benefits, it’s worth the effort to find the right card. 

Let’s start with the rewards. Although you won’t earn top-tier perks (such as airline lounge access) with a no annual fee credit card, you can still earn some nice rewards. Cash back or travel rewards are most common,⁷ but some cards offer rewards points that you can spend on a variety of products and services. Cash back credit cards typically offer 1-1.5% of purchases, usually redeemed as a statement credit – though you may earn more on select categories, such as gas or restaurants.⁸ Travel rewards cards generally allow you to earn points as you make purchases, then use those points either to book travel or to apply toward a previous travel expense. 

As you consider which of these rewards will be most valuable to you, you’ll also likely want to consider the incentives and/or interest rates offered by the card issuer. The options for no annual fee credit cards may include:

• A low APR, either for an introductory period or ongoing. A low APR allows you to earn rewards on routine purchases (such as gas or food). This also can be a good choice if you anticipate carrying a balance on the card.
• A 0% introductory APR can save you money if you use the card for a big purchase or transfer other balances to the card.
• A sign-up bonus, which may be offered as a set amount of a statement credit or rewards points, or as a match of the cash back you earn during a specified period.

Finally, don’t overlook the benefits offered with the card you’re considering. Benefits, unlike rewards, are always there for you – not earned as you spend. The benefits provided with no annual fee credit cards may include:⁹

• Purchase protection coverage.
• Extended warranty coverage.
• Return protection benefit.
• Fraud protection.
• A free credit score. Whether these and other benefits are important is up to you.
  

Before selecting a card, make sure you understand all the associated costs. Keep in mind that no annual fee is not the same as no fee. And you should know when fees are imposed and how much they are. Other fees you may be required to pay besides interest on balances include:

• Late fees.
  
• Cash advance fees.
• Returned payment fees.
  
• Foreign transaction fees.
  

Another thing: When applying for a no annual fee card, pay attention to the length of time the lack of fee applies. Is it forever? Is it just the first year, or another fixed amount of time? Keep an eye out for an asterisk next to the “no annual fee” language in promotional materials. If you see one, read the fine print.