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- Cards with annual fees tend to offer better rewards than no-fee cards, but you should gauge whether you will get your money’s worth before signing up for cards that charge a fee.
- If you are a frequent traveler, for one, there are fee-carrying cards that offer top-notch travel rewards that might make them worthwhile.
- It’s a bad idea to sign up for an annual fee card when, for instance, you carry debt and should be focused on paying it off, or if an issuer offers a lot of a card’s benefits only for the first year.
What is an annual fee and why do credit cards have them?
An annual fee for a credit card is the price a cardholder must pay for continuing to own the card. It’s billed yearly, typically on the date the card was first issued to you.
If a card issuer charges an annual fee for a card, it’s usually to offset the costs of the many perks and benefits the card offers. But just because a card offers a bunch of perks doesn’t mean those perks will be worth the money.If you’re considering applying for a credit card with an annual fee, make sure that the benefits you hope to receive outweigh the cost of the annual fee. Let’s explore some scenarios in which it does and doesn’t make sense to pay an annual fee.
When it makes sense to pay a credit card annual fee
From bigger bonuses to travel perks, here are a few scenarios where it might make sense to apply for a credit card with an annual fee:
You’d get top-tier rewards (especially travel) that justify an annual fee
Generally, an annual fee is a trade-off for top-notch cash back, miles, points or various other benefits. Travel credit cards, in particular, are known for their annual fees. Some premium travel credit cards like The Platinum Card® from American Express have annual fees as high as $695.
Many issuers offer two versions of the same credit card: one with an annual fee and one without. The rewards systems for no-annual-fee cards are usually not as generous as those with fees. For example, the Capital One VentureOne Rewards Credit Card has no annual fee and gives you unlimited 1.25X miles on all purchases. However, if you pay the $95 fee for the Capital One Venture Rewards Credit Card, you can earn an unlimited 2X miles on every purchase — that’s about 60 percent more miles.
You’d earn a hefty sign-up bonus that offsets the annual fee
Sign-up bonuses, also called welcome bonuses, require a certain amount of spending within an introductory period, and many cards without an annual fee come with these offers. However, the spending threshold and welcome bonus amount is typically much higher with annual fee cards.
Using the same cards as an example, Capital One Venture Rewards cardholders pay a $95 annual fee but also have the opportunity to earn 75,000 miles once they spend $4,000 on purchases within three months of opening the account. Capital One VentureOne Rewards cardholders, on the other hand, only have the opportunity to earn 20,000 bonus miles after spending $500 on purchases in the first three months.
Capital One miles are worth 1 cent per mile when redeemed for travel statement credits So, depending on how you redeem your miles, that means the Venture’s welcome bonus could be worth $750, while the VentureOne’s welcome bonus could be worth $200. Even if you subtract the cost of the annual fee, you still end up with far more value from the Venture card.
However, you still have to keep in mind the spending requirements. The higher sign-up bonus from an annual fee card is useless if you don’t spend enough (or worse, overspend) to reach the spending threshold.
You’d enjoy elite travel perks that only an annual-fee credit card can give you
When you pay a credit card annual fee, expect to be rewarded with a few extra perks. To make travel experiences as hassle-free as possible for cardholders, travel cards with an annual fee often feature travel benefits such as:
- Trip cancellation insurance
- Lost luggage reimbursement
- Travel accident insurance
- No foreign transaction fees
- Free checked bags
Some cards go even further, offering features like airport lounge access, rideshare credits, annual travel credits, credits toward TSA PreCheck or Global Entry, elite status at various hotels and more.
The higher the annual fee, the better the perks. Premium credit cards with high annual fees, like the Amex Platinum with a $695 annual fee and the Chase Sapphire Reserve® with a $550 annual fee, deliver a slew of high-end perks to cardholders.
When a credit card offers the right combination of rewards, discounts and benefits, paying an annual fee — even a high annual fee — could upgrade your travel experience and save you money in the long run.
You’re rebuilding your credit and can afford to do so with a card that charges an annual fee
Some credit cards for people with bad credit charge annual fees, although there are exceptions. If your credit history puts many cards out of reach, you might consider applying for a credit card with a small annual fee to help you build your credit until you can qualify for a better card. One example is the Mission Lane Visa® Credit Card, which is geared toward people with bad to fair credit and charges an annual fee of $0-$59, depending on your credit.
Another option is a secured credit card, which requires an upfront security deposit. Generally, your credit limit will match the amount you provide as a security deposit. The benefit of these cards is that the security deposit is one-time and refundable, whereas annual fees are recurring and non-refundable. However, security deposits may require a bit more upfront cash. Many require at least $200, while credit card annual fees for these cards are usually under $100.
When it doesn’t make sense to pay an annual fee
We’ve established that a card with an annual fee can certainly pay for itself (and then some), but whether it does depends on how much you charge to the card and how often you use the perks. Here are a few scenarios when it may make more sense to steer clear of annual fee cards:
You don’t spend enough to make up for the cost of the annual fee
For every card with an annual fee, there should be a point at which you spend enough to recoup the cost of your annual fee. For example, if your card earns 2 percent cash back on everything and charges a $100 annual fee, you would have to spend $5,000 before your earnings surpass the cost of the annual fee ($5,000 x .02 = $100).
If you were trying to stick to a budget of, say, $500 per credit card bill, it would take you 10 months to earn $100 in cash back. In the remaining two months of the year, you’d earn $20 in cash back, meaning you only came out $20 ahead for the entire year. You wouldn’t be losing money, but you also wouldn’t be gaining much.
If you stuck to your monthly budget of $500 and instead used a no-annual-fee card that earns 1.5 percent cash back on everything, you’d come out $90 ahead for the year ($6,000 x .015 = $90).
If you’re deciding between a card with an annual fee and a card without one, it’s worth doing some quick math with a sample budget to estimate your net earnings.
You won’t use the additional perks that an annual-fee card would provide
Card benefits and perks are sometimes harder to assign value to. Though many benefits, like free checked bags and airport lounge access do have concrete monetary value, they’re worthless if you don’t use them.
For example, among other benefits, the Blue Cash Preferred® Card from American Express offers a complimentary ShopRunner membership. This service offers free two-day shipping when you shop with select merchants. That sounds pretty great, but you should take the time to investigate the participating merchants. Do you shop often with them? Enough that free two-day shipping will be valuable? Then, decide whether you’re likely to remember to make your purchases through ShopRunner.
If your answer to any of those questions is no, that perk shouldn’t be a factor in your decision. You might find that the card’s rewards rates are high enough to justify the annual fee alone, or you might decide that it isn’t worth it.
You have credit card debt and can’t afford to add an annual-fee card to your portfolio
Credit card perks and rewards are a nice bonus for people who can pay their statements in full each month. But if you’re working on paying down a credit card debt balance, it’s probably not a good idea to add another charge to the mix. The average credit card interest rate is over 20 percent, so it’s best to put every extra dollar toward debt before you start pursuing rewards.
Your card’s benefits disappear after the first year
Some cards pack a lot of benefits into the first year, from boosted rewards rates and welcome bonuses to memberships with popular retailers. While these may offset the annual fee in year one, you should take them out of the equation to gauge value for the following years.
The bottom line
How much would you pay for a top rewards credit card? $95 per year? $125? How about $550? If you want to know whether a credit card annual fee is worth it, take a careful look at all of the rewards and benefits the credit card offers. Then, ask yourself whether the value you would realistically get from those benefits will outweigh the cost of the annual fee.
If the annual fee feels too expensive, or if you aren’t sure whether you’ll really use all of the perks the credit card offers, you might want to consider a no-annual-fee credit card instead.
Here’s one more tip: If you have a credit card with an annual fee and you no longer think the annual fee is worth it, you can always contact your credit card issuer and ask to downgrade your card to a no-annual-fee version.
Issuer-required disclosure statement
Information about the Mission Lane Visa® Credit Card has been collected independently by Bankrate. Card details have not been reviewed or approved by the issuer.