It often doesn’t make sense to pay an annual fee for a credit card. Plenty of credit cards are offered with no annual fee, and consumers often can't justify paying an annual fee in terms of rewards or benefits that might be offered in exchange. Occasionally, however, a card offers benefits that truly justify the cost of an annual fee. Here are four circumstances in which the expense might be worth it, depending on the individual's spending habits and travel patterns.
- Credit cards sometimes charge higher annual fees in exchange for benefits, perks, and exclusive offers.
- It often makes sense to apply if the card offers a one-time bonus that exceeds the annual fee.
- Individuals with poor credit may have no other option but to use cards with annual fees, but the cost is sometimes worth it if it increases their credit scores over time.
- Failing to pay balances in full or making late payments can lead to fees and interest charges that overshadow any benefits offered by the credit card company.
What Does an Annual Fee Mean on Credit Cards?
An annual fee used to be quite common on all credit cards in previous decades and helped card issuers to be profitable. They have become less common in today's credit card market and typically only exist at the two extreme ends of the market - the premium travel card market (for cards that offer large bonuses, hefty rewards earning structures and premium travel benefits) and the subprime market (for those with bad credit that can't get large credit lines or have any other credit options). So, the annual fees of today are charged in exchange for exceptional value for the well-heeled or for mere access to credit for the low end of the market.
When You Might Decide to Pay an Annual Fee
1. The Card Offers a One-Time Bonus that Justifies the Annual Fee
Many credit cards offer substantial incentives to get you to open an account. Common rewards include enough frequent flyer miles to earn a roundtrip airline flight, a generous statement credit that offsets some of your purchases, or points that can be redeemed for gift cards or travel expenses.
Obviously, if the annual fee is $100 and the bonus is worth $100, there’s little reason to apply. But if the annual fee is $125 and the incentive is $655 worth of airfare, you might want to take a second look. The Citi ThankYou Premier Card has been known to offer such opportunities.
For example, one promotion offered 60,000 ThankYou points, which could be redeemed through the ThankYouTravelCenter for $750 worth of travel expenses. Cardholders must spend $4,000 within three months of opening the account to get the points. The net benefit is $655 after the $95 annual fee (waived for the first 12 months).
2. Rewards Earned From Everyday Spending Exceed the Cost of the Annual Fee
It’s pretty easy to find a credit card that offers 1% cashback on all purchases, or that offers a higher cashback percentage in categories that change from month to month. What’s not so easy to find is a credit card that offers a high percentage of cashback, month in and month out, on necessary purchases. To get a deal like this, you’ll likely have to pay an annual fee, but depending on your household’s spending habits, you could come out far ahead.
The American Express Blue Cash Preferred card, for example, offers 6% cash back at U.S. supermarkets (up to $6,000 of purchases) and 3% back at U.S. gas stations, as well as 3% back at certain department stores and 1% back on everything else in exchange for a $95 annual fee. If your family spends $500 a month on groceries (or $6,000 a year), 6% cash back would give you $360 a year, for a net benefit of $265. If you spend a lot on gas, the card becomes an even better deal.
3. The Card Offers Ongoing Travel Perks Worth More than the Annual Fee
If your travel patterns align with the incentives offered by a particular credit card, rewards can be substantial. For example, if you frequently stay at Marriott hotels, you could be earning numerous free hotel stays with the Marriott Bonvoy Brilliant American Express card. This card has a hefty annual fee of $450 but offers a $300 credit annually for purchases at Marriott hotels.
After opening an account, cardholders are also credited with 75,000 bonus Marriott Bonvoy points (estimated value of $600) after making $3,000 in purchases within the first three months. Cardholders also get six Marriott Bonvoy reward points for every dollar of purchases at hotels, three points for spending at U.S. restaurants and flights, and two points on other eligible purchases. The card also offers a free night stay at Marriott hotels annually. Taking all of these rewards into consideration, it's no surprise that the Marriott Bonvoy Brilliant American Express card is among the best rewards cards available.
Credit card deals are always changing; that's why it pays to shop around and read the fine print before opening a new account.
4. The Only Card You Can Get Approved for Has an Annual Fee
If you have poor credit, are trying to rebuild your credit score, and the only card you can get approved for has an annual fee, the fee could be money well spent. A better credit score can mean the difference between being approved for a loan or not. It can also mean substantial savings on your loan because people with higher credit scores generally qualify for lower interest rates. The key is to pay the annual fee only while you’re working toward a higher credit score. Once you’ve arrived, switch to a different card that doesn’t carry a fee.
What Is an Annual Fee for a Credit Card?
An annual fee is a lump sum that needs to be paid every year that you're signed up for certain credit cards. Typically these fees, which range from $95 to $500, are offset by exclusive perks. These benefits might include airline miles, points, or cash back opportunities.
Is It Worth It to Pay an Annual Fee for a Credit Card?
If you will use your credit card enough to earn a substantial amount of benefits, points, or cash back, paying the annual fee is certainly worth it. If you won't use your credit card that much, or worse, you will struggle to stay responsible with your credit line, it would be better to avoid using a card with an annual fee.
Why Does My Credit Card Have an Annual Fee?
An annual fee helps credit card companies earn a profit. They are paid in exchange for great reward opportunities like miles, points, or cash back.
The Bottom Line
If you fail to pay your balance in full every month or if you have a habit of making late payments, penalties, fees, and interest will probably overshadow any benefits you see from a credit card with a high annual fee. In other words, don’t expect to benefit from these deals unless you’re extremely responsible with credit. Also, keep in mind that if you must spend more than you otherwise would have to get these deals, they aren’t really deals.
Before you sign up for any credit card with an annual fee, calculate whether it really offers a net benefit in your specific situation. And think about the consequences before deciding to enter a new credit card agreement.