Credit Cards

Why Do Credit Cards Have Annual Fees

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

You’re looking to upgrade your current credit card. Credit cards with large rewards programs and several value-added bonuses stand out when you peruse credit card roundups and issuer application pages. You’ve probably already decided to apply to at least one of these jobs, so you’ve added them to your list.

When it comes time to make a final choice, you should go back through your shortlist and give each card your full attention. There’s a pattern there, and you see it when: All of them need you to pay a yearly subscription fee, which may range from several hundred dollars to about a grand.

Reluctantly, you accept my explanation. When there is no assurance that you will use your credit card sufficiently to earn points or take advantage of perks to cover the annual fee, there is no credit card that is worth paying for.

Anyone who has ever applied for a credit card may relate. Many secured credit cards and certain premium cash rewards credit cards carry annual fees, as do most of the best travel rewards credit cards and small business credit cards. All potential cardholders eventually have to make a decision between a high-quality card that charges an annual fee (perhaps because it is one of the finest credit cards in its category) and a less desired card that does not charge a fee.

In what circumstances would it be prudent to go with the former? It is true, and it applies in a wide variety of situations.

When Should You Consider Paying an Annual Fee for a Credit Card?

When could it be worthwhile to pay a credit card’s annual fee? If you’re trying to pick between a Visa, Mastercard, or American Express product, these factors can help.

  1. You Are At The Very Start Of Your Credit History

Issuers of credit cards are wary of applicants with short credit histories. Most people immediately dismiss their applications. If an issuer is prepared to take a chance on a potential cardholder with poor credit, they would almost certainly restrict the cardholder’s spending, charge them exorbitant interest rates, and require a hefty security deposit.

Annual fees are commonplace on credit cards that target customers with poor credit. These charges are often between $25 and $50 each year, which is reasonable in comparison to the yearly rates associated with premium cards. A credit limit of $300 or $400 may not seem like a lot of money to someone with a six-figure income, but it may be a huge chunk of change for someone with a limited budget.

People who are just starting out in the credit world or who have suffered a setback such as bankruptcy may be left with no other choice except to apply for a credit card. People in this situation often choose the OpenSky Secured Visa Card due to its favorable terms ($35 yearly fee).

  1. You are not eligible for a No-Annual-Fee Card.

What if you have credit history, but it isn’t stellar? It’s possible you won’t be approved for a no-annual-fee, cash-back rewards credit card from a major bank. It’s possible that you won’t be approved for even a no-frills credit card aimed for those with mediocre credit, such as Capital One’s Platinum Visa.

In such instances, a secured credit card with associated fees is a good place to start. The finest secured credit cards provide a transparent road to an unsecured card for responsible cardholders, one that can be completed in a matter of months rather than years.

  1. You intend to take advantage of a 0% APR Purchase Promotion.

Avoid signing up for a credit card with an annual fee only so you may take advantage of a 0% APR purchase deal for a short period of time following account setup. The best low-interest credit cards often don’t have annual fees and provide lengthy introductory 0% APR periods.

Nor do credit cards that provide cash back without charging an annual fee, such as the Capital One Quicksilver card, which offers a 0% APR purchase incentive for 15 months and limitless 1.5% cash back on all purchases, every day.

However, where there are many fee-beneficial circumstances present, a lengthy 0% APR campaign might be used as a tiebreaker.

One great option is the American Express Blue Cash Preferred® Card (here’s our full review of the American Express Blue Cash Preferred). The $95 yearly fee is more than made up for by the 6% cash-back rate on grocery store spending, up to $6,000 in annual supermarket purchases.

In addition, Blue Cash Preferred offers a promotional 0% APR on purchases for a full year. This is helpful if you need to make a large grocery store purchase before a special event, such as Christmas or a graduation celebration, but don’t have the funds available to pay for it all in a single payment.

  1. Minimum Spending Requirements for Your Preferred Card’s Welcome Bonus Can Be Met Easily

The majority of credit cards with an annual charge provide new cardholders with spending-based incentives (called sign-up bonuses, early spend bonuses, welcome offers, and new cardmember offers, among other names).

It’s possible to find really generous incentives. For instance, if you sign up for the Chase Sapphire Preferred card and spend $4,000 in the first three months, you will receive 60,000 bonus points. When used in the Chase Ultimate Reward online booking system, that’s equal to $750 in value. The $95 yearly price for Sapphire Preferred doesn’t hold a candle to this.

It may be worthwhile to forgo the first year or two of a credit card’s annual fee if doing so would allow you to meet the minimum spending requirements for the card’s new cardholder incentive without causing serious financial hardship.

  1. You Travel A Lot and Aren’t Brand Loyal

There is typically an annual charge associated with premium general-purpose travel rewards credit cards. Credit card deals like the Capital One Venture Rewards Credit Card and the Chase Sapphire Preferred Card come in at a more modest $100 or less. Some, though, go above $400.

  1. You frequently travel with the same brands.

Brand loyal tourists place different importance on certain amenities than those who are brand neutral. Fortunately, there are a plethora of co-branded credit cards ready to help them out. Credit cards for airlines and hotels are the two most popular kinds of co-branded cards. Choose a co-branded card with care, and not only because of the annual cost.

  • The brand’s size and reach, as indicated by the number of properties for hotels and destinations served for airlines.
  • The number of partner brands that allow direct redemptions or transfers of the brand’s loyalty currency, if any exist.

Those two indicators show how flexible your card is and how likely you are to keep most of your trip spending inside its ecosystem, unless you know you only plan to visit a small number of locations for the near future.

  1. You Can Spend Enough to Recover the Annual Fee Through Rewards

Those with a moderate to high spending pattern can often make up the yearly cost in a single or two shopping trips. If you spend more than $3,167 on dining and travel with your Chase Sapphire Preferred card each year, your earnings will more than cover the annual cost of $95.

The problem is that the weight you have to carry grows each year that you pay the yearly fee. You would need to charge over $10,000 in annual travel on your American Express Platinum card to break even if you assumed a 5% return on travel expenditures and didn’t take into account its airline fee credit.

This card’s generous perks are tailored to your way of life and purchasing preferences, which is why it’s number eight on our list.

These perks are most commonly linked with premium co-branded and general-purpose travel credit cards, therefore they typically overlap with the first two scenarios. Even yet, such a fact does not diminish their prospective worth.

  • Exchange Rates That Are Favorable When Transferring Money to a Partner. The potential usefulness of this perk for customers who have several travel reward memberships is hard to exaggerate. The Chase Sapphire Reserve® and Chase Sapphire Preferred® Card, two of the greatest all-around travel credit cards, both provide 1-to-1 point transfer ratios, meaning that cardholders may exchange 1 point of card loyalty currency for 1 point or mile of partner currency. This is a great method to easily increase the value of your rewards because partner currency is often more valuable than card currency, the value of which seldom surpasses $0.015 per point even when exchanged for the best statement credits.
  • Reimbursement of Airline Service Charges. Airline charge credits, a perk offered by many travel credit cards (most notably The Platinum Card® from American Express), are attractive to brand-loyal frequent fliers. When you enlist in Platinum, you’ll get a $200 yearly credit for incidental travel expenses (like baggage fees) from the airline of your choosing. When used to its maximum potential, this benefit practically halves the $695 annual charge of the Platinum Card to $495. Fees and interest rates for this card may be seen on the rates and fees page.
  • Gains from Host Hospitality. Both premium co-branded and general-purpose cards commonly provide guests of certain hospitality brands or collections with complementary incentives, such as accommodation upgrades and experiences. According to American Express, the value of the Fine Hotels & Resorts privileges included with the Amex Platinum card is $550 on average each stay. As part of the perks offered by the Hotel Collection, guests can use a $100 credit against room, restaurant, spa, and resort expenses at participating hotels.
  • Promotional Credits for a Particular Brand. Some credit cards for vacationing give rebates on purchases made with predetermined stores or stores’ websites. The Amex Platinum credit for Uber, which may be worth up to $200 annually, is a welcome perk. Multiple American Express credit cards provide monthly credits of $10 to be used at the popular food-delivery apps Seamless and GrubHub. You may earn bonus points or cash back on Lyft rides with many different Chase credit cards that provide travel and cash back perks (through March 2022). If you’re interested in applying for one of these deals, you should contact the issuer first because they are more likely to be canceled than permanent perks.
  • Superior Bonus Types for Reward Programs. For example, the American Express Blue Cash Preferred Card offers a 6% rate of return on the first $6,000 spent annually at U.S. supermarkets and a 3% rate of return on all qualified spending at U.S. petrol stations, both of which are considered bonus areas.
  1. The company provides a clear downgrade option.

It’s convenient to be able to switch from a card with an annual charge to one without, rather than having to cancel your membership altogether if you decide after a year or two that you’re not receiving your money’s worth. It’s possible that closing it will lower your credit score because it will lower your available revolving credit and raise your credit-utilization ratio.

If you want to know for sure if your selected card has a downgrade option, you should contact the issuer. It’s likely they have a downgrading policy, even if it’s not made obvious on their website.

Bottom Line

Credit cards with annual fees typically provide more useful features and rewards than their fee-free counterparts. The Blue Cash Preferred® Card from American Express (see rates and fees) is one example of a card that offers a significant rewards program but comes with a cost, while the Blue Cash Everyday® Card from American Express is a more basic card that does not charge an annual fee. When using Blue Cash Preferred, you may earn twice as many rewards in grocery stores and 50% more at petrol stations.

It’s likely that a fee-bearing card is preferable to a card without an annual charge if you can take advantage of any of the situations mentioned above to offset the cost of the fee.

Plus, that’s assuming you’ll be charged an annual fee. You may or may not be successful in having your credit card’s annual fee waived; nonetheless, it is common knowledge that card issuers have the option to do so. You can get a lot out of the ten or fifteen minutes it takes to phone your issuer and threaten to terminate your account.

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