Are Annual Fees Worth It? They Sure Are to Credit Card Companies
Annual fees are a big moneymaker for credit card companies, but are they a waste for consumers?
If you're in the market for a new credit card, there are several features you'll want to look at. You should make sure your card comes with a reasonable interest rate (since you never know when you might be forced to carry a balance), a generous rewards program, and whether the card changes an annual fee.
There are plenty of credit card options that don't require you to pay an annual fee. At the same time, many cards do come with a fee, and that fee can range in cost.
In some cases, you'll get away with an annual fee of just $95, which will sometimes be waived during your first year as a cardholder. In other cases, you might pay an annual fee of $250 or more.
A new report by The Ascent reveals that annual fees earned the credit card industry $13 billion in 2020. But are those fees something you, as a consumer, should avoid?
Annual fees can be worth it
If you're looking at two credit cards that are comparable, but one comes with an annual fee and the other doesn't, then the decision may be pretty clear cut -- go with the card that won't charge a fee. But that doesn't mean it's always a bad idea to pay an annual fee.
Often, credit cards that charge annual fees offer more generous rewards programs than those that don't. Say you're looking at a credit card with no fee that offers 1% cash back on groceries. An annual fee card that charges $95 a year might offer 3% cash back on groceries. If you spend $10,000 a year at the supermarket, you'll get $300 back from the second credit card, whereas with the first card, you'll get $100. And so even if you have to pay a $95 fee, you're still a little over $200 ahead.
Also, some annual fee credit cards come with generous sign-up bonuses. You may, for example, get a chance to snag $500 cash back for spending $3,000 within three months of opening a new card. If that's a spending threshold that's easy for you to meet, and the card has an annual fee of $250, you can still come out ahead by $250.
Finally, some travel rewards cards charge an annual fee but also come with money-saving benefits. Imagine you take several flights a year and use a travel card with a $95 annual fee to book them. If having that card gives you free checked baggage for each trip you take, that fee could easily pay for itself over a couple of flights.
Don't write off annual fee cards
Credit cards with annual fees may seem like they're not worth applying for. But in some cases, you'll gain a lot by paying a fee.
If a card that comes with a fee hits your radar, dig into the details and compare it to no annual fee cards. You may find that the amount you're being charged to have that card is more than justifiable given the benefits you stand to reap.
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