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They say you get what you pay for, but does that hold true for credit cards? Some people refuse to pay an annual fee just to have a credit card while others pay annual fees for a credit card that they feel is worth it.
So which type of card is better?
When deciding whether to pay an annual fee, you need to consider how you use your credit card and how much you spend. Those who use credit cards to earn rewards and spend a large amount each month are likely to benefit from the higher rates of return offered by cards with annual fees. (Those who regularly take advantage of the travel benefits offered by premium reward cards could find their annual fees worthwhile as well.)
On the other hand, those who only put a modest amount on their credit cards and have little need for travel benefits or other potential perks may not see the downside to choosing a card with no annual fee.
When to Pay an Annual Fee
Imagine a credit card user named Susan who’s a frequent traveler. She travels at least once a month and spends about $3,000 a month on her credit cards. While there are some basic travel reward cards offered with no annual fee, someone like Susan who travels and spends often could benefit from a card with an annual fee.
Several airline credit cards charge $95 annually, but offer valuable benefits such as a free checked bag, priority boarding and discounts on in-flight food and drinks. Since most airlines now charge $25 per checked bag each way, Susan could make up the annual fee if she has to check a bag for two round trips.
Even if Susan doesn’t travel often, she spends enough each month to justify paying an annual fee for a premium cash back credit card. The no-fee American Express Blue Cash Everyday, for instance, offers 3% cash back at supermarkets (on up to $6,000 each year), 2% cash back at gas stations and various department stores and 1% cash back on everything else.
By paying the $95 annual fee (after one year of $0 intro annual fee) for the American Express Blue Cash Preferred version, she could earn 6% cash back at supermarkets (on up to $6,000 each year), 3% cash back at gas stations and various department stores, and 1% cash back on everything else. If she spends $6,000 a year at grocery stores, then she will receive an additional $180 in rewards, easily outweighing the cost of the annual fee.
When Not to Pay an Annual Fee
Now let’s consider a recent college graduate named Seth who’s on a tight budget and doesn’t travel much since he’s still paying off student loans. He only spends about $500 a month, and since he occasionally carries a balance, he’s looking for a card with super-low interest rates.
Thankfully, there are decent credit cards out there without an annual fee. If Seth wants to earn cash back rewards, it wouldn’t be worth it to use a card with an annual fee to earn a higher rate of rewards, due to how little he uses his card.
So here’s the bottom line: By taking a closer look at how you use your credit cards and how much you spend on them each month, you can decide whether a card with an annual fee is right for you.
Of course, before you apply for any card, be sure you know where your credit stands. Good credit scores are generally required to qualify for the better plastic out there. Plus, the last thing you want is to be denied for a card and see your score suffer as a result of the hard inquiry. (You can view two of your credit scores, updated every 14 days, for free on Credit.com.)
If your credit is on the less-than-stellar side, you may be able to improve your score by paying down debt, disputing any errors you find on your credit report and not applying for new lines of credit until your score has bounced back.
Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.
At publishing time, the Amex Blue Cash Everyday and Blue Cash Preferred cards are offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for either one of these cards. However, this relationship does not result in any preferential editorial treatment.