By Allan Halcrow | American Express Credit Intel Freelance Contributor
4 Min Read | September 22, 2020 in Cards
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:
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 $49 to $550,2 though you may find an annual fee as low as $253 or as high as several thousand dollars.4 But there are also many no annual fee credit cards.
Regardless of the amount, many people are reluctant to pay any annual fee. A recent national survey conducted on behalf of Experian found that 33% of Americans with credit cards are “concerned” by annual fees. When it comes time to get a new card, the survey found, 54% look for a no annual fee credit card.5 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.6
Here are some common situations in which paying an annual fee may make sense:
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:
Now here’s Card 2:
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.
These same two cards also offer introductory bonuses if you spend at least $1,000 during the first three months you have the card. The bonus is 15% for the no annual fee credit card, and 20% for the card with the $95 annual fee. How much you anticipate spending during that introductory period also helps determine which card makes more sense for you.
You might want to run the numbers on travel credit cards, too. At one end of the spectrum are cards branded for airlines or hotel chains – these cards often charge annual fees of $95 and up. Although the rewards you earn generally are limited to the brand, the annual fee may still be a good deal. One airline-branded card, for example, offers a free checked bag for the cardholder and a companion. Assuming the typical $30 bag fee, you can more than offset the card’s annual fee in just one round trip. Toward the other end of the spectrum is an elite travel credit card with a $550 annual fee. But that card’s perks are rich. Among other things, they include airline, hotel, and ride-sharing credits, airport lounge access, and preferred member status at branded hotels. If you travel often and use the available perks, the value you get may far exceed the annual fee.
A final point on the math: Don’t forget to consider interest charges. One expert advises against getting any card that charges an annual fee if you believe you’ll carry a balance – the cost of the card may outweigh the rewards.
Most Americans prefer no annual fee credit cards, but that’s not always the smart move. Instead, you can consider how you’ll use the card – and do the math. In many cases, cards with an annual fee may be a better value.
1 “Credit Card Annual Fee Explained,” The Balance
2 “Is Paying an Annual Fee for a Credit Card Worth It?,” Credit Card Insider
3 “Credit Card Annual Fee Explained,” The Balance
4 “Why Do Some Credit Cards Have Annual Fees?,” US News & World Report
6 “Is It Worth Paying an Annual Fee for a Credit Card?,” NerdWallet