Unfortunately, many credit cards are accompanied by 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 offer no annual fee credit cards you can take full advantage of. There are two types that you can encounter:
1. No annual fees during the 1st year of being a cardholder
2. No yearly fee for the duration of your credit card
Both are considered good options, but you should familiarize yourself with the annual fees before deciding which one to choose. Sometimes, getting a credit card with yearly fees is worth it. And, sometimes it’s better to get a no-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 Is an Annual Fee?
Your credit card issuer charges a yearly fee for account maintenance. They’re also used to paying for additional perks that might come with a credit card. Some of those perks could include:
Credit card benefits
Most credit cards with such fees have interesting and valuable features, such as extended warranties on purchases or price protection, and the fee covers these costs.
Membership in rewards programs
One of the most significant benefits of having a credit card with an annual payment is the ability to join a rewards program. Your rewards can accumulate and offset the fee.
Insurance protection
Your credit card’s yearly fee can cover trip cancellations, rental car coverage, and more. These are just some perks that can come with a credit card with such a fee. The perks you’re offered depend entirely on your credit card issuer. Now, when it comes to the cost of your fee, it depends on the type of credit card you choose. These fees can cost between $30 and $600; the more expensive ones typically have more benefits. However, if you don’t pay the fee on time, you’ll be hit with high interest rates, damaging your credit score.
This 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 this fee in monthly installments, but this isn’t quite as common. Certain credit card issuers offer credit cards that don’t have fees in the 1st year. This doesn’t mean there are no fee credit cards, as after the promotional period, you will have to start paying an annual fee if you decide to keep the card.
What Benefits Do Come with Yearly Fees?
Unless your credit card issuer highlights that they offer no annual fee cards, you’ll likely have to pay this fee. You can always check your contract’s “Pricing and Information” section to make sure, or you could contact your issuer to find out more. In any case, it’s not necessarily bad if you have to pay this fee, as credit cards with fees typically come with certain benefits.
You’ll likely get better rewards if you have a rewards credit card with this fee. Take, for example, a no-annual fee credit card offering 3% cashback on groceries. If you decide to pay for having a card, 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 yearly charge for nothing. In this case, it’s much better to opt for such a credit card.
You will profit from this card if the rewards are higher than the fee. If the cost exceeds your total rewards, you should choose a credit card with a fee.
Are These Credit Cards Worth It?
Annual fees can be high, but sometimes the cost is worth it and unavoidable. It is worth it to get a credit card with a yearly 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 choice but to get a credit card with an annual fee. However, certain issuers offer no annual credit card fees to those with poor credit. It might still be better for you to pay your yearly 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. These credit cards can be a good choice if the rewards offset the cost.
Consider applying if you need certain credit card features
If you need a credit card with a unique feature, and you cannot find such a feature in it, 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 travel perks such as free hotel stays or hotel/airline loyalty programs. If the bonuses and perks are valuable, paying the annual fee might be worth it.
How do I Choose a No Annual Fee Credit Card?
If you keep a credit card solely for emergencies or special occasions and rarely use the rewards it offers, paying the annual fees is an unnecessary expense that you can easily avoid.
You would be much better off choosing a no-fee card. Remember that 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 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 to a No Annual Fee Credit Card
If you’re currently paying a high yearly fee 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-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 better option is to check with your credit card issuer to determine whether you can downgrade to a no-fee credit card. If this option is available, remember that most issuers require you to use your current credit card for at least a year before you’re eligible for a downgrade.
Downgrading can positively affect your credit score, as you can typically continue using your original account. This increases the average age of your credit accounts and your credit score. The issuer won’t have to do a hard inquiry on your credit history and will leave no trace on your report.
The only downside to downgrading is that you can no longer enjoy the perks of 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.