The ins and outs of annual fees
By Allie Johnson
July 28, 2016
That new credit card you’re eyeing may pack a lot of rewards and perks, but it also may come with an annual fee. Before you sign up, make sure the card is worth the cost.
The first thing to know: You don’t need to pay an annual fee to own a credit card. Some cards charge an annual fee, and others don’t.
Annual fees can range from about $50 to $500 or more, with the typical annual fee under $100. Some examples: The Capital One Venture card has a $59 annual fee (waived the first year), the Chase Sapphire Preferred Card carries a $95 annual fee (also waived the first year), and the Citi Prestige Card’s annual fee is $450 a year (plus $50 per year for an additional user). The granddaddy of annual fee cards, the American Express Centurion card, has a whopping $2,500 annual fee.
While an issuer may waive a card’s annual fee the first year, after that the fee will appear on your credit card bill. Plan for it to avoid surprises, says Lacey Langford, an accredited financial counselor in North Carolina. “Definitely budget for an annual fee,” she says.
To help you make sense of the ins and outs of credit card annual fees, we turned to credit and personal finance experts for the answers to some common questions:
Why do credit cards charge annual fees?
In general, the richer rewards and perks a card offers, the more likely it is to charge an annual fee, says Mike Jelinek, who blogs about personal finance for The Simple Dollar. “In my opinion, the best rewards cards on the market tend to have annual fees,” he says.
Jelinek defines the “best cards” as those that let you consistently earn double cash back or bonus miles or points on just about every purchase, with no quarterly or annual caps on rewards.
“Definitely budget for an annual fee.”
— Lacey Langford,
Jelinek points to his own wallet as an example.
His no-annual-fee Chase Freedom card offers 5 percent cash back in rotating quarterly categories, such as restaurants or groceries, and 1 percent cash back on all other purchases. That 5 percent cash back bonus, though, applies to only $1,500 in combined bonus category purchases per quarter. For this reason, Jelinek says he earns much more on the cards that offer double cash back all the time.
He also carries the Chase Sapphire Preferred Card and the Barclaycard Arrival Plus World Elite MasterCard, which both are travel rewards cards that charge annual fees just under $100.
Another plus of annual fee cards? They often offer a “massive” sign-up bonus, he says.
Should you pay an annual fee?
The No. 1 question to ask if you’re considering a card with an annual fee, or already paying an annual fee, is whether you’re getting your money’s worth to make the card worth the cost.
Jelinek recommends calculating only the value of rewards, because you can’t always be sure how much dollar value you’ll get from card perks.
First, add up your typical spending for one year. If possible, use your old credit card statements to see how much you spent in various categories, says Jim Angleton, president of AEGIS FinServ, an issuer of credit and debit cards.
If you’re trying to decide whether to keep a current card with an annual fee, and you’ve been using that card for all your spending, simply add up the dollar value of the rewards you’ve earned in the past year and compare that to the annual fee.
If you’re considering applying for a new rewards card, add up how much you’d earn in points or cash back on the card with an annual fee and compare that to how much you’d earn on a card with no annual fee, Jelinek says. And factor in any sign-up bonus offered, because that can easily be worth $500 or more.
If you do want to put a value on a card’s perks, consider the travel perks you know you’ll use. For example, if you travel once a month and a card offers free checked baggage, you should be able to come up with a hard number for your yearly savings.
Also, know that if a card doesn’t have an annual fee, the issuer may be making up for that by charging other fees or a higher interest rate, Angleton says. “There is no free lunch,” he says. So make sure you look at the total cost of owning the card and all the fees.
How to get rid of an annual fee
If you sign up for a card that waives the annual fee initially — maybe you wanted to snag a great sign-up bonus before the annual fee kicks in — you have three options:
“There is no free lunch.”
— Jim Angleton, president
of AEGIS FinServ,
talking about annual fees
1. Request a fee waiver. Call the credit card company and politely ask that the annual fee be waived, Langford says. “If you’re paying your bill in full every month, that gives you a lot of negotiation power,” she says. When you call, mention that you’ve looked over offers from competitors for cards that don’t charge annual fees, but that you’d really love to stay with this company, Angleton says. Even if the fee has been added to your bill, the issuer may agree to remove it if you ask, she adds.
2. Switch to a different card. Ask if it’s possible to switch to a no-annual-fee card with the same card issuer, Langford says. If you already have a no-annual-fee card with that issuer, you may be able to transfer some or all of the credit limit from your annual fee card to the no-fee card. Then you can cancel the card that charges a yearly fee without decreasing your credit limit. This can help prevent a hit to your credit from decreasing your total available credit, Langford says.
3. Cancel the card. If you no longer want the card, cancel it — but do it the right way. don’t close the card in a huff if the company won’t waive your annual fee, Angleton says. Instead, plan ahead so you can either cash in your existing rewards on that card or transfer the points or miles to a different program, Angleton says. Otherwise you could lose your rewards. If you’ve got good credit and no debt, closing the account shouldn’t ding your credit too much, Langford says.
Paying an annual fee on a credit card is an individual decision, and you should do it only if it makes sense for you, Langford says. If you can get the same or similar benefits without paying a yearly fee, that may be the better way to go. “You have to weigh all your options,” she says.