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.
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.
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.
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.
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.
No Annual Fee Card Offers Recap
No Annual Fee Cards Frequently Asked Questions
If you’ve been approved for a no annual fee credit card with poor credit, or your credit score has been damaged while you were holding this card, you can still build your credit score with it.
As long as the credit card issuer reports to all the major credit bureaus, and as long as you’re paying all your bills and debts on time and incur no late payment fees, your credit score will be improved with a no annual fee credit card.
The process of improving your score might go slightly faster if you were paying the annual fees, but as long as you’re a responsible cardholder, you can and will build credit, regardless of the type of credit card you have.
Most no annual fee cards do offer some nice rewards to cardholders. However, the rewards might not be as great as those that come with a credit card with annual fees. You can still enjoy all the perks of having a credit card, you can collect points, get cashback credit cards, etc., without paying for the high annual fees.
When choosing your credit card, it’s important to check how beneficial it can be for you. If you’re paying your annual fee, and its cost is higher than the rewards you’re getting on an annual basis, this card isn’t worth it, and you should opt for a no annual fee credit card.
If your total annual rewards are higher than your annual fees, then your card should be beneficial to you, and you might want to consider paying the annual fee for the higher rewards.
If you currently have a credit card with annual fees, you might be able to downgrade to a no annual fee credit card offer, but this depends entirely on your credit card issuer. If you have this option, it’s much better to downgrade than to close your current account and open a new one.
When you downgrade, this will not have a negative effect on your credit report as your issuer doesn’t have to do a full credit check. Your account age won’t be affected either, as you’ll likely be able to keep your current account.
The only drawback of downgrading to a no annual fee credit card is that all the rewards and benefits of your previous card won’t be transferred to your new card.
The cost of your annual fees will depend on your credit card issuer. These are the most common fees that can encounter, and they’re the most variable.
You can expect to pay anywhere between $30 and $600. Such high fees typically come with valuable rewards and bonuses, but it’s important to calculate whether they will be worth it to you.
If you opt for a no annual fee credit card, you won’t have to pay a dime for your annual fees. These credit cards don’t charge for account maintenance, but you’ll still be charged for other fees that are specified in your contract. Those can include foreign transaction fees, balance transfer fees, interest rates, etc.
If you have poor credit or little to no credit history, you might not be able to get a no annual fee credit card, or it could be difficult to get approved for one. All this doesn’t mean that it’s impossible to get a no annual fee credit card with poor credit – it simply depends on the credit card issuer.
Before you apply for a no annual fee credit card, make sure you check the issuer’s requirements. If the issuer offers no annual fee credit cards to those with poor credit, this will be emphasized, and the issuer will let you know.
If your credit card has annual fees, you have no choice but to pay them. Not paying this fee will result in additional charges for late payment, will increase your interest rates, and will damage your credit score.
Certain issuers might allow you to bypass the annual fees by charging a certain amount on the credit card itself once a year. If this seems like a better option, contact your issuer to whether they have this offer.
If you don’t want to pay any annual fees whatsoever, you can apply for a no annual fee credit card. These credit cards don’t have annual surcharges and can be much more beneficial for you. They do come with fewer rewards and bonuses but don’t cost anything to hold.
If you weren’t required to pay the annual fee in the first 12 months of using your credit card, your issuer most likely had a promotion that offered the card without the annual fee for the first year. These promotions last for a limited period of time, and the annual fee will be charged when the promotion period is over.
If the issuer has made changes to their fees and rates, they are required by law to notify you of any changes at least 45 days before they can take effect. If the issuer has decided to impose annual fees on your current no annual fee credit card, you have the option to decline it. If you decline the new fees, you will need to close your current account, so consider this decision carefully.
Contact your credit card issuer if you have any questions about your credit card fees, as every issuer imposes different fees.
If you have to pay your annual fees, you will most commonly be charged 12 months after you’ve been approved for your credit card. Certain issuers will charge you immediately upon opening your account, but this is less frequent.
Although the charge is most commonly applied once a year, you might encounter issuers that allow you to pay the fee in monthly installments. You’ll still be paying the full amount of your annual fee, but the cost will be divided into smaller monthly payments.
Not paying the annual fee on time will result in late payment fees, and will affect your credit score, so be sure to always pay your credit card fees and debts on time.