What Is a Credit Card Annual Fee?

A credit card annual fee is what you pay for certain cards – usually to enjoy special features and perks. The fee is charged most often in these two cases:

• On cards that offer better-than-average rewards and therefore cost credit card companies more to provide.
  
• On cards designed for people with no credit or poor credit who therefore pose a greater risk of defaulting on payments. 

The fee is typically charged in full when you open your account and then once a year in your anniversary month, though a few cards will divide the fee into installments and collect it monthly.¹ The fee generally ranges from fairly small, like $49² to $695 or more with cards on the higher end of the spectrum usually offering the most benefits. But there are also many no annual fee credit cards.

Regardless of the amount, some people are reluctant to pay any annual fee. But some experts advise against choosing a card based solely on whether you’ll pay an annual fee. Depending on how you use it, they say, a card with an annual fee – even a high one – may make better financial sense than a no annual fee credit card.³

Here are some common situations in which paying an annual fee may make sense:

• You have poor or limited credit history and are unable to qualify for a no annual fee credit card.
• You charge enough that the rewards you earn offset the fee.
• You travel often, and want the perks offered by certain cards.
• You want features available on cards that charge a fee, such as an introductory bonus or the ability to transfer points. 

In some cases, accepting an annual fee may be your only way to get a credit card. For example, suppose you have poor credit. Yes, there are some no annual fee credit cards designed for people in this situation. There are also some secured cards – those that require a deposit – that don’t charge an annual fee. If your application is not approved for those options, you may have to choose between the annual fee or doing without a card.

In most of the other situations listed above, you can make the best decision by getting out the calculator and doing some math. For example, let’s consider two cash back rewards cards offered by the same company. Here’s a rundown of Card 1:

• No annual fee.
• 3% cash back at supermarkets.
• 2% cash back at gas stations and some department stores.

Now here’s Card 2:

• $95 annual fee.
• 6% cash back at supermarkets.
• 3% cash back at gas stations and some department stores.

When you work out the math, you discover that even after paying the annual fee you’ll come out ahead if you usually spend at least $61 a week on groceries. If you don’t, the no annual fee credit card may be the better choice for you.