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Although some commonly-held credit cards don’t charge an annual fee, other popular cards charge hundreds of dollars per year. Weighing a card’s annual fee alongside its benefits is the key to determining if it is worth what you are charged.
What Is an Annual Fee?
A credit card annual fee is a flat fee incurred for each year a credit card account remains open. Not all cards have annual fees, and the ones that do vary dramatically in how much they charge. Annual fees are, unsurprisingly, not popular. While they are a visible metric for comparison, it’s important to remember that their cost is just one factor in a credit card’s overall value and is one of many ways credit card companies can make money.
Annual fees are often charged as a way to compensate for other aspects of a card that are especially favorable to the cardholder. This includes access to special perks and features or other above-average rewards. They’re also common on cards geared toward “riskier” customers with poor credit history who might otherwise have a tough time receiving approval for a card. The annual fee offsets some of the issuer’s risk.
When Do You Pay the Annual Fee on a Credit Card?
Credit card annual fees are typically first paid at the outset of opening an account, but some cards waive the fee for the first year. Occasionally, an annual fee may be divided into monthly installments, payable along the same lines as the card’s billing cycle. The most common, however, is for an annual charge to be billed on the anniversary month of the account’s opening and for this to repeat each year the account remains open.
Factors to Consider When Evaluating Credit Card Annual Fees
Here are some of the factors prospective cardholders should consider when comparing credit cards with annual fees:
Ongoing Memberships and Benefits
Many cards set themselves apart by offering ongoing perks simply for being a cardholder. This is particularly prevalent with travel credit cards. Mid-tier airline cards, for example, usually cost around $95 per year and offer perks like priority boarding and free checked bags. Hotel cards typically extend elite status in loyalty programs, providing benefits including room upgrades or late checkout. In that scenario, someone traveling just once or twice a year could break even with an annual fee.
Premium cards, which can charge between $400 and $695 in annual fees per year, usually offer those perks and much more. Common benefits may include hotel and rental car chain elite status, airport lounge access, travel insurance or discounts on travel booked through the card’s own travel agency. Frequent travelers who use these benefits can receive much more value despite the higher fee—but only if they take advantage of the perks.
The benefits of cards with annual fees aren’t limited to travel. For example, The Platinum Card® from American Express (Terms Apply. See rates & fees) offers up to $200 annually in Uber Cash, a $200 credit for airline incidentals with one qualifying airline, a $240 digital entertainment credit and more. The annual fee offers strong value if you’re likely to use these benefits.
Annual Credits and Bonuses
Looking for a reason to renew a card membership year after year? Several credit cards with annual fees offer a bonus with each renewal.
Some (though not all) airline cards come with renewal bonuses. For example, the Southwest Rapid Rewards® Plus Credit Card deposits 3,000 points into the cardholder’s frequent flyer account each year upon card renewal. The Alaska Airlines Visa Signature® credit card comes with a renewal offer as well: an annual companion fare starting at $122 ($99 fare plus taxes and fees from $23) after you spend $6,000 or more on purchases within the prior anniversary year.
With hotel credit cards, annual fees and annual bonuses are common. Nearly every co-branded hotel card charging an annual fee offers a certificate for a free night upon renewal. The fine print varies, sometimes excluding high-end hotels or limiting free stays to weekends, but it’s generally not hard to break even on the annual fee by redeeming the free night certificate.
One-Time Welcome Bonuses
Big welcome bonuses often come with big fees. For example, new cardholders can earn 80,000 bonus miles after spending $5,000 on purchases in the first 3 months from account opening with the United Club℠ Infinite Card, but they’ll have to shell out $525 as an annual fee for the privilege. Customers who value the bonus miles more than the cost of the annual fee easily come out ahead. Perhaps the best benefit of this card, though, is it grants access to United Clubs when flying United same-day. Those who would otherwise consider purchasing a lounge membership directly can access the same membership for less through the credit card.
Some cards will waive the annual fee in the first year (an even larger advantage for new cardholders), but all fees apply beginning in year two. Because of this, one should consider the long-term implications of applying for a card. Is the card still a good deal in the long run when the annual fee must be paid but the cardholder no longer receives a welcome bonus? For some, the long-term benefits and rewards will still outweigh the annual fee.
Rewards Rate
Many arguments for paying an annual fee are most applicable to frequent travelers who can take advantage of included credit card benefits. But even if you don’t travel, earning cash back at higher rates might make a credit card annual fee worth it.
Cards like the Blue Cash Preferred® Card from American Express (Terms apply. See rates & fees) offer earnings rates on everyday expenses that are high compared to cards without an annual fee. While this Blue Cash Preferred card, for example, charges a $0 intro annual fee for the first year, then $95, it also earns 6% cash back at U.S. supermarkets on up to $6,000 per year in purchases (then 1%), 6% cash back on select U.S. streaming subscriptions, 3% cash back at U.S. gas stations and on transit (including taxis/rideshare, parking, tolls, trains, buses and more) and 1% cash back on other eligible purchases. Cash back is received in the form of Reward Dollars that can be redeemed as a statement credit or at Amazon.com checkout. If a cardholder maxes out on groceries alone, they will net $145 more than they would through a no annual fee card that earns 2% cash back.
To determine whether paying an annual fee is worth it in exchange for increased rewards, calculate how much you expect to earn at the higher rate and subtract the annual fee. Then, compare that to what you’d earn from a card without an annual fee. In many cases, the annual fee card will outdo its competitors.
Be Realistic When Evaluating Cards
Many cards with annual fees look great on paper but don’t prove as advantageous when the fine print is considered. The Platinum Card® from American Express offers up to $200 reimbursement for incidental fees (like seat selection and baggage) per year from an eligible list of airlines, but if you find that you don’t make those purchases or don’t fly that list of airlines, the benefit will be difficult to use.
Other perks purposely require the cardholder to jump through hoops to use them. For example,the American Express® Gold Card (Terms apply. See rates & fees) offers up to $120 in dining statement credits for those that enroll in the benefit, but it’s awarded as a $10 reimbursement per month and valid only for select restaurants and delivery services.
When evaluating cards, it’s important to recognize which perks you would use naturally and which would provide value only through a concerted effort to use them. It’s not typically recommended to change your spending habits to obtain a card benefit, even if it seems generous. Remember that the card should fit you, not the other way around.
When Is an Annual Fee Worth It?
It can feel counterintuitive to pay a fee for the ability to spend money, especially considering that there are some great no annual fee cards on the market. So when are annual fees actually worth the cost?
For the most part, credit cards with annual fees offer more than a financial relationship. They bundle memberships, perks, cash credits and rewards for a flat rate. This can add up to big savings compared to buying the same services à la carte. Of course, this depends on how many benefits you’ll use.
When it comes to evaluating credit card annual fees, consider these four important factors:
- Ongoing memberships and benefits
- Annual credits and bonuses
- One-time welcome bonuses
- Rewards earning rates
In some cases, a single factor might be enough to justify a credit card annual fee. An annual bonus worth $100 can cancel out a $95 annual fee, with any further perks simply serving as icing on the cake. For other cards, one might need to consider several factors to determine if it’s a good fit.
How To Get a Credit Card Annual Fee Waived
Lifestyles change, and so do card benefits. A credit card that’s a good fit one year might not be the next. It’s worth reviewing a credit card’s perks, rewards and other upsides each time the renewal fee is due to see if the benefits still outweigh the cost. Those who say “no” still have several options to save on a credit card annual fee.
Some accounts might be eligible for special offers to retain a customer, including waiving annual fees. It never hurts to contact your card issuer and ask. In other scenarios, you might be able to downgrade to a card with a lower cost (and fewer benefits) or even change to a similar card without annual fees. Also, some cards offer to waive the annual fee for the card’s first year as a way to attract new cardholders.
Ultimately, a credit card that costs more than it’s worth should be canceled. Just be careful about the timing because canceling cards can impact your credit score by decreasing available credit and increasing your credit utilization ratio. If you’re planning to apply for a mortgage or car loan in the near future, you may want to wait until the financing process is complete before you close any credit card accounts.
Find The Best No Annual Fee Credit Cards Of 2024
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Bottom Line
Credit cards with an annual fee shouldn’t register as an automatic “no.” Instead, take a close look at the overall cost and benefits of the card. After accounting for enhanced rewards and valuable perks, a credit card with an annual fee could certainly be worth it. But if you can’t find a clear path to offsetting a card’s annual fee, looking for a more cost-effective option may be wise.
To view rates and fees for The Platinum Card® from American Express please visit this page.
To view rates and fees for the Blue Cash Preferred® Card from American Express please visit this page.
To view rates and fees for the American Express® Gold Card please visit this page.
Frequently Asked Questions (FAQs)
Why do I pay an annual fee for a credit card?
Not all credit cards charge an annual fee, but those that do likely do it for one of two reasons: Either the annual fee balances out relatively generous bonuses—benefits or rewards like airline miles, cash back, discounts and travel perks—or compensates for higher-risk lending with cards designed for people with a poor credit history.
How is an annual fee different from a transaction fee?
An annual fee is paid each year a credit card account is open and exists independently from the cardholder’s day-to-day activity. By contrast, a “transaction fee” describes any number of additional service fees a credit card may levy for actions beyond normal purchasing, such as foreign transactions, balance transfers and cash advances.
Annual fees are baked into the basic cost–benefit of a particular credit card, but potential cardholders should also consider transaction fees for any transactions they intend to make (e.g. balance transfer fees, foreign transaction fees). The term “transaction fee” is sometimes also used to describe credit card processing fees, a separate matter regarding merchants who accept credit card payments.
Which is the best credit card without an annual fee?
Cards with no annual fee may benefit consumers who find low utility in the perks typically offered, who won’t use the credit card much or who put a high value on low “overhead” costs. Credit card shoppers like these should check out our list of the best no annual fee credit cards, which can help them find a card with no annual fee that still offers a great degree of rewards or benefits. Consumers should also be sure to consider other costs like penalties for late payments and transaction fees when comparing no annual fee credit cards, as annual fees aren’t the only type of fee to watch out for.
