Whether you currently have a credit card or not, you’ve probably heard of credit cards with annual fees. You may wonder why you’d want to pay a fee for something that you could get for free, but sometimes it can be worth paying a fee for a credit card.
Here’s what you need to know about credit card annual fees and whether this type of card is right for you.
What’s a credit card annual fee?
A credit card annual fee is a fee that card issuers charge in order for you to use a particular credit card. Plenty of credit cards on the market don’t have annual fees, but many cards come with annual fees ranging from $49 to $550. Annual fee credit cards typically come with rewards and cardholder benefits.
You’re more likely to come across annual fees with these types of credit cards:
- Travel credit cards
- Secured credit cards
- Subprime credit cards
- Rewards credit cards
- Premium credit cards
When and how are annual fees charged?
Credit cards typically charge annual fees once per year. Some credit card issuers divide the fee into installments and collect a payment monthly. If you’re not sure when your annual fee is due, you can contact your credit card company.
Many credit cards come with promotional offers that waive the annual fee for the first year, but if they don’t, you may have to pay the annual fee when you first open your account. Going forward, you’ll likely be required to pay this fee once a year in your card’s anniversary month.
Keep in mind that even if you don’t use the credit card to make any purchases, you’ll still need to pay the annual fee, and on time, or you can incur a late payment fee on top of the annual fee. The annual fee will automatically be added to your account’s balance but is technically separate from your interest payments.
Is it worth it to pay an annual fee for a credit card?
If you’re hesitant about paying an annual fee, it’s worth noting that in some instances it can make sense to pay for a credit card. As always, it depends on your financial situation and goals, so only you can decide if a credit card with an annual fee is a good fit for you. Here are a few situations when it might make sense to get a card with an annual fee.
Rewards earned from everyday spending exceed the cost of the fee
If you crunch the numbers and realize that the rewards you’ll earn by making your typical purchases with the credit card will offset the fee, then having a card with an annual fee and good rewards can work in your favor.
The credit card has a great one-time bonus that justifies the fee
Sometimes, a credit card’s introductory bonus or other features (like the ability to transfer bonus points) are so beneficial that paying the annual fee makes financial sense.
The travel perks are worth it for you
If you travel often, you may find you quickly rack up travel points and airline miles with a premium credit card or travel credit card. This can lead to travel savings that are much more substantial than the annual fee.
You need to build credit
If you have poor or limited credit history, it can be challenging to qualify for a credit card without an annual fee. If you only qualify for a credit card with an annual fee, it can be worthwhile to pay this fee and use your credit card to build a better credit history by making your payments on time and in full. Paying an annual fee to boost your credit can be well worth it.
When to avoid an annual credit card fee
A credit card with an annual fee isn’t for everybody. Here are some of the reasons why it may not be a good fit for you.
You struggle to make payments
If you struggle to make your credit card payment every month, or are regularly late on payments, this type of card probably isn’t right for you, since penalties and fees may outweigh the benefits you get from the card.
You’ll be tempted to spend more
If the credit card in question would make you spend more money than you normally would just for the sake of earning perks, you’re not really getting the most out of the card. Spending just to earn a card’s rewards typically isn’t the way to go.
You don’t spend enough to justify the fee or the benefits go unused
If you just aren’t going to use the card that much, there’s a good chance that the rewards you earn won't cover the annual fee. You may also find that you don't utilize the cardholder benefits enough to justify paying the annual fee.
The card is no longer meeting your needs
Credit card programs and rules can change, which could make the card less valuable to you depending on your spending habits. Even if the credit card program or rewards structure doesn’t change, you may find over time that keeping the card open just doesn’t make sense for you. In some cases, it may be wiser to switch to a credit card with similar perks that don’t charge an annual fee. If you’re thinking about canceling your card, call your credit card issuer — it may throw a retention offer your way that makes keeping the card worthwhile.
What to do if you no longer want a card with an annual fee
If you have a credit card that charges an annual fee and decides it’s no longer right for you, you can close your credit card account. But before you close your account, follow these steps.
- Redeem any rewards you have left. Don’t let your hard-earned points go to waste. Make sure you redeem any outstanding rewards before it’s too late.
- Consider how closing your account will affect your credit. Closing a credit card can hurt your credit score, since your available credit will go down and your credit utilization ratio will go up. Before you close your credit card, have a plan for how you’ll help your score bounce back. You may be able to offset the impact of closing a card by paying down balances on your other credit cards.
- Think about switching to a credit card with no fee from the same company. Sometimes card issuers will let you downgrade to a card with no annual fee while keeping your account open. This way you can avoid paying the annual fee, and your credit score won't take a hit.