Credit card annual fees are fees charged to credit cardholders to keep their cards active. Have you ever wondered if paying these fees is worthwhile and if there is a way to avoid them? Let’s find out with Hanfincal in the following article.
1. What is an annual fee for credit cards?
A credit card annual fee is charged by the credit card company that you must pay each year to keep your card. This fee on a credit card is typically a fixed amount paid on the anniversary of when you first opened your account.
If you get your card in March, you’ll have to pay the annual fee every March as long as the account is still open. This fee is typically added to your card balance and will appear on your billing statement.
2. Why do credit cards have annual fees?
Card companies charge annual fees to cover the costs of providing cardholders with diverse features and benefits. Travel credits, exclusive rewards, and free checked luggage on flights are generous cardholder benefits. In many cases, the more benefits you receive, the higher the annual fee.
Here are some types of credit cards that have annual fees:
- Secured credit cards may have a low annual fee.
- Travel cards frequently have higher reward values and may include a slew of additional travel perks such as trip cancellation insurance, lost luggage insurance, etc.
- Annual fees are typically charged for premium cards with luxury perks such as access to VIP airport lounges, free hotel upgrades, generous sign-up bonuses, and benefits and perks on flights.
- Cash back and reward cards with the highest cash back and reward rates.
- Cards with generous welcome bonuses.
Why do credit cards have annual fees?
3. How to pay credit card annual fees?
The annual fees are added to your balance once a year and appear on your monthly statement. The fee is usually reflected on your first statement after opening the account and then every 12 months. Furthermore, some issues require the annual fee divided into monthly payments.
Plus, how much is the average annual fee for a credit card? The exact amount depends on the level of perks and rewards provided by the specific card. On the other hand, these fees typically begin at around $50 and reach nearly $700 for premium-level cards. Given the Consumer Financial Protection Bureau, the average annual fee charged in 2020 will be $94.
4. Benefits of annual fee credit cards
There are three benefits that annual fee credit cards bring to cardholders.
4.1. Building credit
The first benefit of annual fee credit cards is to build the credit if you keep your credit utilization low and make your card payments on time each month.
Annual fee credit cards are usually intended for people with poor or no credit history. While paying an annual fee may not be ideal, opening an annual fee credit card and using it to build credit may have long-term benefits. One of them is that you can also apply for loans and credit cards more quickly.
4.2. Cash-back rewards
Annual fee rewards credit cards may offer higher rewards rates than no annual fee options.
For travel, annual fee cards frequently provide more benefits, protections, and annual credits than no-fee cards. Even if you don’t travel, the ability to earn higher rates of cash back may make a credit card annual fee worthwhile.
To see if an annual fee is worth it for higher rewards, calculate how much you expect to earn at the higher rate, subtract the annual fee, and compare that to what you’d make from a card without a yearly fee. You could be further ahead in many cases.
The Credit One Bank American Express Credit Card is one example. It has a $95 annual fee. Customers can earn 5% cash back on the first $5,000 spent on groceries, cable, gas, internet, cell phone service, and satellite TV every year. If you do a lot of shopping and drive to work every day, you could easily earn enough cash back to cover the card’s $95 fee and still make a profit.
4.3. Travel perks or a massive sign-up bonus
Another benefit of the annual fee credit card is to bring travel perks or a massive sign-up bonus to cardholders. Details information is as follows:
- Airline cards: Co-branded airline cards typically provide benefits equal to or greater than the annual cost of ownership.
- Hotel cards: Having a co-branded hotel card is frequently worth more than the money you paid for it.
- General travel cards: You aren’t loyal to any particular hotel or airline, preferring to select the option that best meets your needs for that specific trip. Some cards may be worth the out-of-pocket expense, especially with large sign-up bonuses.
Benefits of annual fee credit cards
5. How to figure out if a credit card’s annual fees are worth paying?
5.1. Are you confident in managing the credit card?
If you are unsure about your financial management skills, using credit cards and paying annual fees can stress and strain your current financial situation, especially if the yearly fees are pretty high. Some cards with more perks and higher annual fees may have more moving parts than just paying your bill on time each month.
Depending on the card you choose, you may be required to spend in specific categories to receive bonus points. You’ll also need to ensure that any insurance benefits or subscription discounts are activated.
If you’re just starting on your credit journey and aren’t confident in your ability to use credit responsibly, begin with a standard secured card or a student card to become a responsible credit user first.
5.2. Are the perks really necessary?
Examine whether the benefits of the card are truly necessary for you. Consider the benefits you receive in exchange for paying annual fees to generate worthwhile profits. If you don’t travel frequently, it’s not worth paying for a credit card that primarily offers travel perks like free checked bags, elite hotel status, or rideshare credits.
Consider your personal values first. This will help you find a credit card that is more closely aligned with your lifestyle, and you will avoid feeling as if you are paying an annual fee for something you may not care about.
5.3. Will paying the annual fee provide you with more value?
Consider whether your credit card rewards or benefits outweigh the value of annual fees. If so, don’t be afraid to pay these fees to reclaim and reap the benefits.
If you pay a $500 annual fee, but the value of the benefits you receive is less than $500, the fee may not be worth it. However, the welcome bonus can be worth covering the annual fee several times over on some cards.
6. Can credit card annual fees be avoided?
There are some tips to avoid the annual fee if you’re tired of paying this fee:
- Look for other cards that do not charge an annual fee. Although there aren’t many options for you to choose from on these cards, they’re still there to help you save money on your annual credit card fees.
- If you currently have a card with an annual fee, you should ask your card issuer if you can switch to one that does not.
- You could even cancel the card if you didn’t come up with a way to avoid paying annual fees while still using a credit card. However, keep in mind that canceling a card can affect the average age of your open accounts and the types of credit you have. Both of these things can affect your credit score.
Almost all credit card issuers charge credit card annual fees. However, a few companies waive these fees when a customer opens a new card for the first year. Please double-check the information before applying to ensure that the annual fees are not excessive and negatively impact your financial health. In case you still have any troubles with your credit cards, let Hanfincal know, we can support you in dealing with them.
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