Are Credit Card Annual Fees Worthwhile?
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. These include perks like 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 creditworthiness 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 utilize annual fees for certain credit card products — often ones catering to lower-quality consumers. This includes those with poor credit scores, who may not be able to qualify for regular credit cards. In this case, the annual fee helps reduce risk for the issuer, even if just barely.
More importantly, issuers charge fees for some below-average or sub-prime credit cards for a very simple reason: because they can. These customers have few options if they desperately need a credit card, and will resort to paying an annual fee in order to get the card in their wallet.
For most cards charging an annual fee, the first year’s fee is waived as part of the introductory offer. So, be sure to check the terms and conditions to determine if you’ll need to pay your fee up front, or on the first anniversary of your membership.
The value of the annual fee
Whether or not 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 may be worth the annual fee.
The important thing here is to weight the credit card’s benefits against its annual fee. Will you get more out of the benefits than you pay to use the card each year? And will you actually remember to use those benefits so that you make the most of this annual fee expense?
For instance, if you’re looking at a credit card with a $50 annual fee and flat-rate 1.5% cash back, how much do you need to spend on the card to even earn back your annual fee? About $3,300. If you’re not going to spend more than that on your credit card in a year, the annual fee isn’t worthwhile.
Of course, these calculations can get more complicated when it comes to cards with variable cash back or rewards points for different types of spending. And if you carry a balance on the card, even for part of the year, you’re likely to pay more in interest charges than you’ll be able to earn back in rewards. Add that to the annual fee, and you could be looking at a pretty hefty spend just to be able to use a particular credit card.
You’ll also want to consider the card’s other benefits, such as concierge services, travel agencies, and special members-only events. If you’ll use these services, they may be worth paying a small annual fee for. But you’ll often find that these services don’t offer you anything you couldn’t do for yourself online.
If you’re considering paying an annual credit card fee just for the services the card offers, it’s important that you shop around. See how much you’d pay for similar concierge or travel agency services. Or look into how much you would pay for car rental insurance, if that’s a benefit that the card offers.
You may not even need to pay for these services and benefits elsewhere. Instead, you might be able to find another credit card that offers these benefits for a lower annual fee — or for no annual fee at all.
In some 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. If you’re looking at a very high-rewards card that you’ll pay off each month and will get major points-based or cash-back benefits from, the annual fee may be worth your while.
Let’s say, for instance, that you choose to use a cash-back credit card with a $95 annual fee. The card offers 6% cash back on your first $6,000 of supermarket spending each year, plus 1% cash back on all other purchases. If you meet the $6,000 grocery spending threshold, that’s $360 back. Then let’s say you put another $6,000 of other spending on the card. That’s a total of $420 back for the year, which clearly outweighs the credit card’s annual fee.
As long as you make these calculations before you decide to take on a credit card with an annual fee, you may find that this is a good option for you.
However, if you’re looking at a card with annual fee just because of additional, non-points or cash-back benefits, you may want to reconsider. Many no-fee cards offer concierge services, member benefits, car rental insurance, and similar perks to their members.
So what if you have very low credit and can’t find a card without an annual fee? You might consider starting off with a secured credit card, instead, to begin building your credit. Once your credit improves, you can move over to a no-fee credit card with decent rewards.
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 an introductory annual fee for the first year, new customers might be able to negotiate this and avoid paying the annual fee once. The cards that offer an introductory annual fee of $0 for the first year, then after that introductory period the annual fee is charged.*
|Credit Card||Annual Fee||Introductory Annual Fee
for the First Year*
|Blue Cash Preferred® Card from American Express||$95||No|
|Southwest Rapid Rewards® Premier Card||$99||No|
|United MileagePlus® Explorer Card||$95||Yes|
|Citi® Hilton HHonorsTM Visa Signature® Card||$0||N/A|
|Gold Delta SkyMiles® Credit Card||$95||Yes|