6 Reasons to Stick to No-Annual-Fee Credit Cards
by Lyle Daly | Updated July 26, 2021 - First published on Feb. 25, 2021
Credit cards with annual fees aren't right for everyone. If any of the following are true, then no-annual-fee cards are the way to go.
One of the first decisions to make when you want to open a credit card is whether you'll get one with or without an annual fee.
An annual fee can obviously get you a card with more perks. Not everyone will get their money's worth, though. If you can't make the most of those benefits, you may waste money on a card you don't really need.
Although everyone's situation is different, there are several common signs you should stick to no-annual-fee credit cards.
1. You don't spend much
For the most part, credit cards with annual fees offer higher rewards rates. If you spend enough, the rewards you earn will make up for the annual fee. But if you're not a big spender, you could get more value from a no-annual-fee rewards card.
To give an example, the Capital One® Savor® Cash Rewards Credit Card has a $95 annual fee and earns 4% cash back on dining and entertainment. The no-annual-fee version, the Capital One SavorOne Cash Rewards Credit Card, offers 3% back in those categories.
The Capital One® Savor® Cash Rewards Credit Card is only the better deal if you spend more than $9,500 on dining and entertainment per year. In that case, the extra 1% back would earn you over $95 in rewards.
You can do the math anytime you're comparing credit cards to see which will get you more value. As a general rule, it usually takes at least $1,000 in credit card spending per month to justify an annual fee.
2. You can't afford any extra costs
This is a simple one. When money's tight and you need to avoid unnecessary expenses, it doesn't make sense to pay a credit card's annual fee. Go with a no-annual-fee card for the time being. You can always upgrade your credit card later.
3. You want to pay for big purchases at 0% interest
If you have something expensive coming up that you can't pay for in full, a credit card could help. A 0% intro APR credit card starts you off with zero interest on purchases for an introductory period. Depending on the card, this can last for 12 months or much longer.
The nice thing about 0% intro APR cards is you don't need to pay extra for them. The ones with the longest introductory periods also have no annual fees. And since the whole point of using them is to save money, it's better to get a no-annual-fee card.
Interest rates do go back to normal with these cards after the introductory period ends. For that reason, it's essential you pay off your full balance before that happens.
4. You're looking for a balance transfer offer to refinance debt
Balance transfers can be a smart way to save money on high-interest debt, especially credit card debt. When you transfer balances to one of the top balance transfer credit cards, you can get a 0% intro APR for a set period -- some of these cards offer that introductory APR for 18 months or more. So, you can transfer over your debt and pay it down with no interest charges until the introductory period ends.
Just like 0% intro APR cards, a good balance transfer card shouldn't charge you an annual fee. In fact, the cards that get you a 0% intro APR for the longest time are no-annual-fee cards.
There are a couple of things to remember about balance transfer cards: The interest rates go up at the end of the introductory period, so you should aim to pay off as much debt as possible during that time. And most cards also charge a small balance transfer fee.
5. It's your first credit card
Your first credit card probably won't have a ton of features. When you don't have much of a credit history, you can't qualify for the best credit cards. You'll need to look at credit cards designed for building credit, such as student credit cards and secured credit cards.
Since these cards have fewer perks, you should try to get one without an annual fee. The point is to improve your credit score by building a credit history. You can do that just as well whether a card has an annual fee or not. The advantage of doing it with a no-annual-fee card is that you can keep the card open in the future without it costing you money, which is good for your credit.
Note that many starter credit cards are secured credit cards. These require an upfront deposit to open. That's a one-time cost, and you can get it refunded either when you graduate to an unsecured card or close your secured card. It's not an annual fee, so don't think that you need to avoid secured cards if you're building your credit.
6. You're rebuilding your credit
Similar to the situation above, when you need to rebuild your credit, your card options are much more limited. Card issuers reserve their top cards for consumers who have good or excellent credit.
After your credit has taken a hit, you need to work your way back up. The best way to do this is with a card that doesn't have a yearly fee. You'll be able to fix your credit score without any extra costs. And once again, this means you can keep the card open as long as you want.
Sometimes it's simply smarter to stick to credit cards without an annual fee. In all the situations above, you'll get more value with free credit cards.
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