The best credit card deals are often spoiled by an annual fee. Annual fees can range from about $50 to $2,500, with the high end reserved for the super-select American Express Centurion Card (the “black card”). In return for this fee, credit card issuers provide a range of benefits beyond what typical no-fee cards offer, including free gifts, a travel agency, and a personal concierge.
From the issuer’s perspective, an annual fee makes a card more exclusive. A higher-quality customer (in terms of credit worthiness and income) will apply for these cards, and these customers will spend more on their credit cards than typical non-business credit card users.
Issuers also use annual fees for certain cards catering to lower-quality consumers — those with lower credit scores who may not be able to qualify for regular credit cards. In this case, the annual fee helps reduce risk to the issuer, but just barely. More importantly, issuers charge fees for some below-average or sub-prime credit cards because they can; these customers have few options if they desperately need a credit card.
Often there is an introductory annual fee of $0 for the first year of cardmembership, so be sure to check the terms and conditions to determine if you’ll need to pay up front or on the first anniversary of your membership.
The value of the annual fee
Whether a credit card is worth the annual fee depends on the conditions. The first condition pertains to the benefits you receive for the card in exchange for that annual fee. If the benefits you receive are worth more to you than the cash in your pocket would be, if you will use those benefits, and if the benefits wouldn’t be cheaper through other avenues, the annual fee might be worthwhile. In some cases, like for those with a substandard credit history, the benefit you receive of just having a credit card to use is worth the annual fee.
It’s important to note that whether you use those benefits plays a large role in determining whether the annual fee is worthwhile. It’s easy to say you’ll use the benefits, and then never take advantage. In some cases, you may wish to use the benefits, but find they aren’t all that great. I used a travel agent through a Visa Signature card, for example, but they weren’t able to do anything for me more than what I was able to do using the Internet myself. In fact, the travel agent needed 24 hours to get back to me, while I could have done the same thing immediately.
The second condition is whether you can receive these same benefits for less money from another service, and if those benefits are comparable.
Shop around. Another credit card may offer the same benefits while charging a lower fee — or no fee at all.
Furthermore, if you don’t pay your balance in full every month, you’ll be subject to interest fees. Worse, you could have late fees and higher default interest rates if you’re not careful. Any of these immediately devalue the benefits, and paying an annual fee on top of these other expenses would be even more detrimental to your financial condition.
In most cases, a credit card annual fee is not worthwhile, but at the same time, for some people an annual fee is not an automatic deal breaker. The extra benefits can often be found on cards that don’t charge annual fees, and these benefits are often unnecessary anyway. Even consumers with low credit scores can often find one free credit card for which they qualify. It’s mainly special situations and needs of experienced consumers that help to justify paying annual fees.
I use a credit card that charges an annual fee, waived for the first year. It’s an airline credit card I’ve mentioned before, the United MileagePlus Explorer Card. I recently passed my first anniversary with the card, though they have not yet charged the annual fee. The benefits have already paid for the potential fee, thanks mainly to the ability to check luggage for free on United flights and travel certificates. If I didn’t travel often, and if United didn’t already have low rates for direct flights on the routes I need, there would have been no reason for me to sign up for this card.
Some credit cards with annual fees
For an overview of the typical credit card featuring annual fees, here is a list of some of the most popular. For the cards that are listed as not having the fees waived for the first year, new customers might be able to negotiate this and avoid paying the annual fee once. The cards that waive the annual fee for the first year have an introductory annual fee of $0 for the first year, then after that the annual fee is charged.*
|Credit Card||Annual Fee||Waived First Year?*|
|Blue Sky Preferred from American Express||$75||No|
|Southwest Airlines Rapid Rewards Plus Card||$69||No|
|United MileagePlus Explorer Card||$95||Yes|
|The Business Gold Rewards Card from American Express OPEN||$175||Yes|
|Gold Delta SkyMiles Credit Card from American Express||$95||Yes|
Updated March 10, 2014 and originally published August 17, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.