It usually doesn’t make sense to pay an annual fee for a credit card. Plenty of cards don’t charge one, and consumers often don’t get anything especially useful in exchange for the added cost. Occasionally, however, a card offers benefits that offset or outweigh the annual fee. Here are four circumstances in which the expense might be worth it, depending on the individual's spending habits and travel patterns.
When You Might Decide to Pay an Annual Fee
1. The card offers a sign-up bonus that outweighs 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 free plane ticket, a generous statement credit that makes some of your purchases free, or points that can be redeemed for gift cards.
- Credit cards sometimes charge higher annual fees in exchange for benefits, perks, and exclusive offers.
- It often makes sense to sign up if the card offers a sign-up bonus that exceeds the 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.
Obviously, if the annual fee is $100 and the sign-up 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. The cashback you’ll earn on regular purchases will far exceed 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% cashback at supermarkets (up to $6,000 of purchases) and 3% back at 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% cashback 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. And there's a current welcome offer that gives you $200 back as a statement credit if you spend $1,000 in purchases in the first three months.
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 American Express Marriott Bonvoy Brilliant 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.
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.
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.