I’ve heard many people say that they’d never pay an annual fee for a credit card. And I totally understand the logic behind this.
But as with most things in life, there are exceptions to the rule.
So, before you swear off annual fees for all of eternity, let’s take a look at why some credit cards charge these fees in the first place. After you see what annual fees cover, you might change your mind.
What Is an Annual Fee?
When you get approved for a credit card with an annual fee, the amount is usually charged upfront. Keep this in mind, because it reduces your available credit right away. For example, if your annual fee is $95, and your approved credit limit is $5,000, then your available credit is $4,905 at this time.
[Read: The Best No-Annual-Fee Credit Cards of 2018.]
You’ll find the annual fee listed in the “Rates and Fees” box (sometimes, you’ll see “Pricing and Terms” or another variation), which is usually a link on the credit card’s home page.
So, what are you paying for? The annual fee is like a cover charge you pay to get into a bar to enjoy the live entertainment. With a credit card, the fee gives you access to all the rewards, perks and benefits that come with the card.
It might also come with a dazzling sign-up bonus. All these rewards and bonuses are expensive. So, credit card issuers charge annual fees to help recoup some of this expense.
The amount of the fee varies by issuer and by credit card. A 2018 study by ValuePenguin showed that the annual fees on credit cards ranged from $25 to $550. There are a few credit cards — the elite of the elite — that have annual fees in the thousands.
But for those of us who aren’t extremely wealthy, there’s no need to worry. If you have a great credit score, it’s easy to find an excellent rewards credit card that comes with a reasonable annual fee.
How Much Better Are the Rewards?
A rewards credit card, such as a cash back card, that comes with no annual fee can still offer you great savings on purchases. But the cards with an annual fee kick the rewards up by several notches.
For instance, a credit card that offers 3 percent cash back on groceries sounds pretty good, right? But add a reasonable annual fee to the mix, and maybe you’d get 6 percent cash back on groceries, plus a load of other rewards and perks.
[Read: The Best Rewards Credit Cards of 2018.]
With travel rewards and airline-branded cards, the rewards program can be quite exceptional, such as a $200 credit for in-flight purchases or getting your first checked bag for free. Some travel rewards cards go further and will even waive the first checked bag for a limited number of people in your party.
You could also get intangible benefits, such as priority boarding. I’m kind of petite, and I love being near the front of the line when it’s time to board. I just don’t like all the shoving and the dash for the overhead bins. As you can see, the intangible benefits are kind of personal, and only you can decide what’s worth paying for.
Is It Ever Worth It to Pay an Annual Fee?
There are credit cards that target those with bad credit. Often, these cards have annual fees. For example, a secured credit card might have an annual fee. But there are some secured cards that don’t charge them, so do some research before choosing a card.
The annual fee for these cards helps reduce the financial risk for the issuer. If you’re trying to rebuild your credit and boost your score, then it’s usually worth a small annual fee. Just remember that you must also pay all your bills on time and keep low balances on your credit cards to increase your score.
Now, if it’s excellent rewards that you’re after, then you need to do the math and make sure your rewards exceed the cost of the annual fee. If you choose a credit card that offers the type of rewards you need, you might come out way ahead. But take time to research the rewards program as well as your own spending patterns before applying for a credit card with an annual fee.
[Read: The Best Travel Rewards Credit Cards of 2018.]
One more thing to remember: Most rewards credit cards have higher interest rates. The credit card company knows that a portion of cardholders are going to carry a balance and pay interest, so this is another way for the issuer to make money.
Don’t get a credit card with an annual fee if you think you’ll carry a balance. If you do, the cost of the credit card might very well outweigh the rewards.
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Why Do Some Credit Cards Have Annual Fees? originally appeared on usnews.com
