money

Credit Card Annual Fees: The Hidden Cost of Miles & Perks

TJ Porter

WealthFit Contributor

You’ve likely seen the credit card advertisements before: cashback options, free flier miles, and other enticing perks. But the majority of these reward-based credit cards come with a stipulation: annual fees.

Sure, the fee may not sound like much initially, but it’s something that can add up significantly over time — especially if you’re not using the credit card frequently. In some cases, it can be a complete waste of your money. 

Does it make sense to pay credit card annual fees? Let’s dive deeper into the subject to find out what’s best for you and your finances. 

Disclaimer: Credit Card Debt is “Bad Debt”

Before we talk about credit card annual fees, it’s important to understand that credit card debt is something to be wary of. 

Credit card debt occurs when you can’t afford to pay the balance on your card every month; it then accrues at a high percentage rate. This can snowball, and you can suddenly find yourself in thousands of dollars of debt — and financial stress

Not all forms of debt are bad. But credit card debt is

Bad debt is simply money you’ve borrowed to buy something that doesn’t put money back into your pocket. 

If you currently find yourself in bad debt, utilize these free resources today:

What Is A Credit Card Annual Fee?

If you’re not in bad debt, or you’re looking to apply for your first credit card, let’s break down what an annual fee is.

A credit card annual fee is a charge that the card issuer puts on your card every year. 

You can think of it as being similar to a membership fee for a club: in order to have the credit card, you are required to pay the membership fee. 

Card issuers charge annual fees for the following reasons: 

Compensate for Rewards

Card issuers charge fees to compensate for card rewards and perks, something we’ll explain later on in this article. Premium rewards cards can offer significant value to cardholders, and the annual fee helps the card issuer cover for the cost of providing these rewards.

Business Needs

Another reason is to increase the cardholder’s cash flow. For example, many card issuers who focus on those with poor credit charge annual fees on their cards. 

This helps them compensate for the increased risk of lending to people with poor credit. 

Premium

Some cardholders even charge an annual fee to make a card seem as a premium. 

For example, the American Express Centurion Card charges a huge annual fee —$5,000 — which helps it retain its status as one of the most exclusive cards out there. 

How Much Are Credit Card Annual Fees?

There is a huge range in credit card annual fees. 

For example, the Southwest Plus credit card has a $69 annual fee. The American Express Centurion card charges $5,000 per year.

When it comes to credit cards that the average person will use, most annual fees tend to range from $50 to $200. 

How To Avoid Credit Card Annual Fees

You may not have realized that the credit card you have charges an annual fee, or you may be looking for a card without an annual fee. Either way, here are 3 ways to avoid that yearly cost.

#1: Apply for a Card with No Annual Fee

Not every credit card has an annual fee. If this is your first credit card, we recommend utilizing one that doesn’t have a fee.

To determine whether or not a card has an annual fee, don’t just read the advertisement; ensure that you read the fine print. 

#2: Cancel Your Card

The easiest way to avoid paying an annual fee is to cancel your credit card. If you have a card with an annual fee and don’t use it enough to justify the cost, there may be no point in paying to keep the card open. 

Even if you don’t notice the fee until after the card issuer charges it to your account, some companies will refund the charge if you cancel within a short time of them charging the fee. 

Keep in mind that because much of your credit score depends upon payment history, canceling an account can hurt your credit score

#3: Negotiate 

Another way to avoid annual fees is to call the card issuer and negotiate

The card issuer may be willing to remove or discount your annual fee if you’ve been a customer who has paid bills on time. 

Other times, if you try to close a card to avoid the fee, you’ll get a retention offer to entice you to keep the card open and pay the fee. 

The worst that can happen is that the card issuer says no, so if you’re on the fence about keeping a card with the annual fee, it can’t hurt to call and ask them to waive the fee. 

Sometimes, card issuers waive the annual fee for a card for the first year you have it. This can make it easy to forget that the card charges a fee each year. 

If you don’t want to pay a fee, again look at the fine print of cards before you apply to make sure they won’t start charging a fee after the first year. 

When A Credit Card Annual Fee Is Worth It?

No one wants to pay a fee if they don’t have to. But there are some instances when an annual fee may actually be worth it. Here are 4 of those situations. 

#1: The Signup Bonus Pays for the Fee

Rewards credit cards that often charge annual fees tend to offer sign up bonuses. These bonuses vastly accelerate your earnings when you use the card. 

For example, the Chase Sapphire Preferred Card has a $95 annual fee. It offers at least one point (worth a minimum of one cent) for every dollar that you spend, with additional points for certain types of spending. 

The card also comes with a 60,000 point sign up bonus when you spend $4,000 in the first three months that you have the card. That boosts your minimum earnings per dollar spent to 16 points per dollar. 

If you redeem the signup bonus for cashback, you’ll earn $600, more than paying for the cost of the annual fee. Even if you keep the card for a couple of years, you’ve still come out ahead.

I’ve actually used this strategy to finance a week long trip for two to Switzerland by combining the signup bonuses of the Chase Sapphire Preferred and the Chase Ink Preferred. 

Instead of paying thousands for plane tickets and a hotel, I paid just under $200 in credit card annual fees and used the points I earned from the cards’ bonuses. 

The Perks Are Worth It

Premium credit cards offer premium perks that can be more than worth the cost of the annual fee. 

For example, the Southwest Priority Card charges an annual fee of $149, but cardholders get all sorts of bonuses when they fly on Southwest. Cardholders receive:

  • a statement credit to cover their first $75 worth of purchases from Southwest
  • 4 upgraded boardings each year, free of charge
  • If you want to buy food or drinks on your flight, the card offers 20% cashback on all inflight purchases
  • 7,500 Southwest miles (worth at least $75) added to their account each year

If you fly Southwest even once or twice each year, you can get more than $150 in value out of the card easily. 

Keep in mind that if you already fly with Southwest often, this may be an easy way for you to build your credit score and earn a few rewards along with it. 

Even cards that aren’t partnered with airlines can have perks that outweigh their costs. 

The American Express Gold Card charges a $250 annual fee but offers $120 in dining credits and $100 in airline fee credits each year. 

If you use those perks, the card almost pays for itself, and you only need to get $30 in value out of the other perks, such as its personalized travel services and resort credits and room upgrades to cover the annual fee. 

It Offers Additional Rewards

Some credit cards come in multiple flavors, one with a smaller or no annual fee and another with a larger fee but additional benefits. 

Sometimes, the additional rewards that the higher fee card offers will be worth the cost. An example of this is American Express’ Blue Cash card. 

The Blue Cash Everyday has no annual fee and offers: 

  • 3% cashback on groceries
  • 2% cashback on gas and transit
  • 1% cashback on everything else

The Blue Cash Preferred Card charges $95 per year but pays: 

  • 6% cashback on groceries
  • 3% cashback on gas and transit
  • 1% cashback on everything else

The Preferred card pays 3% more on groceries than the fee-free card. If you only use the card to pay for groceries and spend at least $3,166.67 on groceries each year, the Preferred card is the better choice. 

Once you spend $3,166.66, the additional cashback pays for the card’s annual fee. 

After that, you effectively get the extra 3% cashback for free. 

Don’t forget that changing your card type may be an option with many issuers so that you can adapt the cards in your wallet to changes in your spending habits.

#3: You Need to Build Credit

Many credit card issuers that target people with poor credit charge annual fees for their cards. These fees can range from reasonable to almost extortionate. 

Before you apply for a credit-building card that carries an annual fee, remember that secured credit cards are another option for building your credit. 

These cards require a security deposit but most of them don’t charge any annual fee. 

Try your best to avoid an annual fee if possible. 

But in some cases, depending upon your financial situation, an annual fee may be the only option. In this case, ensure that the fee is small and it comes with some perks that you can take advantage of. 

Credit Card Best Practices

If you’re thinking about applying for a credit card, it’s important to understand how to use credit cards responsibly.

The first thing to remember about credit cards is that they are not free money. You have to pay back whatever you borrow. Remember, carrying a high balance month after month is bad debt. 

If you’re using credit cards, it’s important to pay the balance each month. 

Automatic Payments

To do this, you can either set a calendar reminder, or set up automatic payments, or “autopay”. 

If you set up autopay, your credit card issuer will automatically deduct a payment from your bank account each month. This means that you’ll never miss a payment which can help you earn a good credit score

The danger of using automatic payments is that your payment could overdraft your checking account. Controlling your spending and keeping a buffer in your checking account will ensure this doesn’t happen.

Opening and Closing Accounts

Another thing to keep in mind is that opening and closing credit card accounts too frequently can lower your credit score. 

Every time you apply for a credit card or loan, the lender makes a hard inquiry on your credit report. 

This can drop your score by a few points for up to two years. If you’re approved for the card or loan, it will lower the average age of your credit accounts, which is a major factor in your credit score.

Closing accounts can also lower the average age of your accounts while keeping them open will increase their average age. 

If a card doesn’t charge an annual fee, keeping it open can help your credit. 

If the card does charge a fee, consider asking the lender to change it to a different, fee-free card so you can keep it open.

The Bottom Line: Credit Card Annual Fee

It’s easy to get sticker shock when you look at the annual fees of some credit cards. Is it really worth spending $500 or more just to have a premium rewards card? 

In some cases, these expensive credit cards offer far more value than their cost. But you have to be willing to do the research — and the math — to see what’s right for you. 

Keep in mind that playing the “credit card game” — signing up for cards for their rewards and then closing the accounts time and time again — is not true wealth. 

It’s a short term “hacking” that won’t yield long term benefits. It may lower your credit score, too. 

Here at WealthFit, we define wealth as the abundance of time, money and influence. Utilizing credit cards carefully to build your credit — and earning a few rewards along the way — can be a small part of your wealth strategy, but don’t rely on credit card perks to give you true wealth. 

The bottom line is that if a card’s rewards are going to be worth paying the annual fee, utilize the card wisely. If not, find a credit card that has no annual fee. 

Most importantly, don’t find yourself in bad debt. 

Continued Learning

If you’d like to learn more about credit cards, their hidden fees, and why a credit score is so important, here are a few additional resources:

Editor’s Note: We do not work with the credit card companies mentioned in this article.  

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Written By

TJ Porter

TJ Porter is a Boston-based freelance writer who specializes in credit, credit cards, and bank accounts.

Read more about TJ

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