An annual fee is a fee you pay each year just for having a credit card, whether you use the card or not. Virtually every credit card charges fees, but not all of them charge an annual fee.
The idea of paying such a fee is ludicrous to some. But depending on the situation, getting a card with an annual fee is either unavoidable or worth the price of admission.
Why Credit Cards Charge Annual Fees
There are two main types of credit cards that charge annual fees: credit cards for bad credit and rewards credit cards.
Credit Cards for Bad Credit
There are several cards on the market for people with low credit scores or limited credit history, both secured and unsecured. And while not every such credit card charges an annual fee, many of them do.
Part of the reason for this is the risk that issuers of such credit cards take on. If you have bad or limited credit, studies show that you’re more likely to make late payments or default on your debt than someone with good or excellent credit.
To make up for this risk, credit cards for bad credit typically charge higher interest rates—and some of the annual fees.
Another reason the issuers may charge higher rates and fees is simply because they can. If you have bad credit, your credit card options are limited. If most of the options you do have charge annual fees—and you’re not aware of the ones that don’t—you may think you have no choice.
The good news is that there are plenty of no-annual-fee credit cards for bad credit that don’t charge annual fees, including the Discover it® Secured Card. Do your research, and you can find a card that best suits your needs.
Rewards Credit Cards
Some of the top rewards credit cards charge annual fees. For the most part, that’s because they also offer stellar rewards and benefits. It’s not uncommon to find a travel credit card with an annual fee and a sign-up bonus worth hundreds of dollars.
Others may offer special perks like free checked bags on your favorite airline, elite loyalty status at your favorite hotel, or travel insurance coverage.
Depending on the card and your usage, these annual fees may or may not be worth it. The important thing is that you know what works for you and what doesn’t.
How To Know if an Annual Fee Is Worth It
Some people read the annual fee definition and immediately balk. It doesn’t matter that the card offers a sign-up bonus worth several years of annual fees, or that the card’s benefits are clearly worth at least the amount of the fee each year. The important thing is that you do your due diligence.
If you’re looking at credit cards for bad credit, consider one with an annual fee only if you don’t qualify for a card without one.
If you’re searching for a rewards credit card, you could make an annual fee work in your favor. The key is to know which card to get and how to use it.
Doing the Math on Credit Card Fees and Interest
Some credit card benefits are quantitative, making it easy to determine whether they’re worth the fee.
For example, some of the top hotel credit cards offer a free night’s stay every time you pay your annual fee. In some cases, the annual fee is less than $100 and the value of the free night stay can be worth two or three times that much.
Similarly, many airline credit cards offer free checked bags for you and at least one companion on your itinerary. Most airlines charge $25 one-way for your first checked bag, so if you fly at least two round-trips each year, your savings should make up for the card’s annual fee.
And don’t forget about sign-up bonuses. If you get a card that charges a $95 annual fee and the sign-up bonus is worth $600, you’ll get enough value out of the card in the first few months to cover the annual fee six times over.
It’s also important to consider other credit card fees and the interest rate you’ll pay before committing to a new credit card. If you regularly carry a balance, you may end up paying substantially more when you add up the interest charges over time.
So, if you come across a card you’re interested in, see if you can attach a dollar value to some of the card’s benefits and whether you can use them to offset the annual fee. If you maximize the rewards and benefits right, it could be easy.
Knowing What You Want in a Credit Card
While some perks may be quantitative, others aren’t. For example, you can’t really put a price tag on priority boarding at the airport or elite hotel status. But depending on how you want to travel, and how often, those perks may be worth the money.
The same goes for benefits like trip cancellation insurance, lost luggage reimbursement, or travel accident insurance. You may never cash in on any of these benefits, but having the peace of mind they offer may be worth it.
Is Paying an Annual Fee Right for You?
To determine if paying an annual fee is right for you, consider the type of credit card you want, including the rewards and benefits.
Then take the time to research different credit cards in that category. Run the numbers to determine whether the benefits offset the fees you’ll pay. The more time you spend at this stage of the process, the clearer your choice will be.
And if you have bad credit and don’t qualify for a card that has no annual fee, paying for one might still be worth it if you can build your credit history. Because once your credit is in better shape, you should be able to qualify for a better credit card that doesn’t have an annual fee or at least offers benefits to compensate for one.