Unfortunately, many credit cards are accompanied by some high annual fees. When you add them up with the interest rates and other surcharges, you’re typically left with a high bill to pay at the end of the year.
It doesn’t have to go that way, however. Many issuers do offer no annual fee credit cards that you can take full advantage of. There are 2 types that you can encounter:
1. No annual fees during the 1st year of being a cardholder
2. No annual fees for the duration of your credit card
Both of them are considered to be good options, but before you can decide which one to choose, you should familiarize yourself with the annual fees themselves.
Sometimes it’s worth it to get a credit card with annual fees. And, sometimes it’s better to get a no annual fee credit card. Let’s take a closer look at both, and you can decide which one would suit you and your lifestyle better.
What Exactly Are Annual Fees?
Annual fees are charged by your credit card issuer for account maintenance. They’re also used to pay for some additional perks that might come with a credit card. Some of those perks could include:
Credit card benefits
Most credit cards that come with an annual fee have some interesting and useful features such as extended warranties on purchases, or price protection, and your annual fee is used for covering these costs.
Membership in rewards programs
Having a membership for a rewards program is actually one of the biggest benefits of having a credit card with annual fees. Your rewards can accumulate and offset the cost of the fee.
Your credit card annual fees can cover the costs of things such as trip cancellations, provide rental car coverage, and more.
These are just some of the perks that can come with a credit card with an annual fee. The perks you’re offered depend entirely on your credit card issuer.
Now, when it comes to the cost of your annual fees, it depends on the type of credit card you choose. Annual fees can cost anywhere between $30 and $600, and the more expensive ones typically come with more benefits. However, if you don’t pay the fee on time, you’ll be hit with high-interest rates and will damage your credit score.
The annual fee can be charged as soon as you open your credit card account, or it can be charged after 12 months. You might even encounter issuers that charge the annual fee in monthly installments, but this isn’t quite as common.
Certain credit card issuers actually offer credit cards that don’t have annual fees in the 1st year. This doesn’t mean that these are no annual fee credit cards, as after the promotional period is over, you will have to start paying the annual fees.
Higher annual fees usually have higher rewards, but this is not guaranteed. The most expensive card isn’t always the best, so be sure to get informed about all the features of a credit card and calculate your rewards against the cost of the card before you apply for one.
What Benefits Do Come with Annual Fees?
Unless your credit card issuer highlights the fact that they offer no annual fee cards, you’ll likely have to pay this fee. You can always check the “Pricing and Information” section of your contract to make sure, or you could contact your issuer to find out more.
In any case, it’s not necessarily a bad thing if you have to pay this fee, as credit cards with annual fees typically come with certain benefits.
If you have a rewards credit card with an annual fee, you’ll likely get better rewards. Take, for example, a no annual fee credit card that offers 3% cashback on your groceries. If you decide to pay for your credit card annual fees, you could get a cashback of up to 6%.
The problem here is that the higher rewards aren’t always worth it. If you don’t frequently use your credit card and the rewards that come with it, you’ll just be stuck paying the annual fee for nothing. In this case, it’s much better to opt for a no annual fee credit card.
Although annual fees can seem attractive because of the many benefits, you should always calculate the total rewards that you get in a year and subtract the amount that you need to spend on your annual fee.
If the rewards are higher than the fee, it means that you will profit from this card. If the fee is higher than your total rewards, you should choose a no annual fee credit card.
Are Annual Fee Credit Cards Worth It?
Annual fees can be high, but sometimes the cost is worth it, and sometimes it’s simply unavoidable. It is worth it to get a credit card with an annual fee in the following situations:
Apply if you have a poor credit score
If you have bad credit or limited credit history, you might have no other choice but to get a credit card with an annual fee. Although certain issuers offer no annual fee credit cards for those with poor credit. It might still be better for you to pay your annual fees. Because paying them (and other credit card debts) on time will help you build up your credit score.
Apply if you benefit from the rewards
As mentioned, if you use your credit card often and need the rewards that come with it, a credit card with an annual fee might be worth it. As long as the rewards offset the fee, these credit cards can be a good choice.
Apply if you need certain credit card features
If you need a credit card with a special feature, and you cannot find such a feature in a no annual fee credit card, it’s probably in your best interest to pay for the annual fee.
Apply if the card offers valuable bonuses
Many issuers offer big introductory bonuses (0% intro offers) if you spend a certain amount of money in the first few months of using a credit card with an annual fee. Other issuers offer nice travel perks such as free hotel stays or even hotel/airline loyalty programs. If the bonuses and perks are valuable, it might be worth it to pay the annual fee.
How do I Choose a No Annual Fee Credit Card?
If you’re keeping a credit card solely for emergencies or special occasions, and rarely use the rewards that come with it, paying the annual fees is an unnecessary expense that you can easily avoid.
You would be much better off choosing a no annual fee credit card. Keep in mind that just because there is no annual fee, you’ll still encounter other fees on your credit card, such as foreign transaction fees, interest fees, APR fees, etc.
No annual fee cards still come with rewards and bonuses. They’re simply lower than typical, but you can still benefit from them.
Let’s take a credit card with an annual fee of $100 with a 2% cashback and compare it to a no annual fee credit card with a 1% cashback. It seems that the first card has better rewards, but this isn’t necessarily the case. To actually offset the fee from the first card, you’ll need to spend at least $5000 a year. With this amount, you’ll get 0 profit since 2% of $5000 is $100. It’s just enough to cover the cost of the annual fee.
On the other hand, spending $5000 on your no annual fee credit card leaves you with $50 worth of pure profit with the 1% cashback, making it a much better choice.
Be sure to compare a few different no annual fee credit cards to make sure you’re getting the best card for your needs. Different issuers will impose different interest rates and other fees. Always do your research before making important financial decisions like taking out a new credit card.
Switching for a No Annual Fee Credit Card
If you’re currently paying high annual fees and would prefer to opt for a no annual fee credit card, you have two choices:
- 1. You can cancel your current credit card and apply for a new one
- 2. You can downgrade to a no annual fee credit card and stay with the same issuer
The first option is best avoided as it can affect your credit score. Canceling a credit card immediately increases your credit utilization ratio, which accounts for 30% of your credit score. The higher your credit utilization ratio, the lower your credit score, and you’ll want to avoid this at all costs.
Closing a credit account and opening a new one also reduces the average age of your credit accounts, once again lowering your score.
A much better option is to check with your credit card issuer to find out whether you can downgrade to a no annual fee credit card. If this option is available, keep in mind that most issuers require you to be using your current credit card for at least a year before you’re eligible for a downgrade.
Downgrading can have a positive effect on your credit score, as you can typically continue using your original account, increasing the average age of your credit accounts and increasing your credit score. The issuer won’t have to do a hard inquiry on your credit history, and will, therefore, leave no trace on your report.
The only downside with downgrading is that you will no longer be able to enjoy the perks that come with a credit card with an annual fee. But if you didn’t use those perks in the first place, you’ll have nothing to lose.