Is Paying An Annual Fee Worth It?

Some credit cards that offer valuable rewards may charge annual fees. But you don’t necessarily have to pay an annual fee to get a credit card that offers rewards. There are many excellent credit cards that don’t charge an annual fee, including cards that offer the ability to earn cash back, travel miles and other types of rewards.

What is an annual fee and why do some credit cards have them?

A credit card annual fee is the price a cardholder must pay to maintain ownership of the card. This fee is billed once a year, typically on the date the card was first issued to you.

If a card issuer charges an annual fee for a credit card, it’s usually to offset the cost of rewards the card offers. But just because a card offers rewards doesn’t mean they’ll exceed the value of the annual fee. If you’re considering applying for a credit card with an annual fee, make sure the rewards offered by the issuer justify the cost.

When it could make sense to pay a credit card annual fee

Here are a few scenarios where it makes sense to apply for a credit card with an annual fee.

You’d get top-tier rewards (especially travel) that justify an annual fee

Generally, an annual fee is a trade-off for top-notch cash back, miles, points or various other rewards. Travel credit cards, in particular, are known for their annual fees. Some premium travel credit cards charge fees that can reach hundreds of dollars. For example, The Platinum Card® from American Express charges a $695 annual fee.

Some issuers offer two versions of the same credit card: one with an annual fee and another with a lower annual fee or no fee at all. The rewards for cards with no annual fee are not as generous as those with fees.

For example, the Capital One VentureOne Rewards Credit Card has no annual fee and offers unlimited 1.25X miles on all purchases. However, if you pay the $95 annual fee for the Capital One Venture Rewards Credit Card, you can earn unlimited 2X miles on every purchase — that’s over 60 percent more miles. Then there’s the Capital One Venture X Rewards Credit Card, which charges a $395 annual fee and still awards 2X miles on your purchases, but also throws in extra travel perks and statement credits.

You’d earn a hefty sign-up bonus that offsets the annual fee

Sign-up bonuses, also called welcome bonuses, require a specified amount of spending within an introductory period. Many cards without an annual fee come with these offers. However, the welcome bonus amount and spending threshold are typically higher for cards with annual fees.

As an example, if you pay a $95 annual fee but have the opportunity to earn 75,000 miles after spending $4,000 on purchases within the first three months of opening the account, that bonus could be worth $750 assuming each mile is worth 1 cent.

In contrast, a similar card with no annual fee might only earn 20,000 miles after spending $500 on purchases in the first three months, which is only worth $200. Even after accounting for the annual fee, you still end up with far more value by choosing the card that has an annual fee, assuming you can meet the spending requirements.

You’d enjoy elite travel features that a credit card with an annual fee can give you

When you pay an annual fee for a credit card, expect a few extra perks. To make travel experiences as hassle-free as possible for cardholders, travel cards with an annual fee often feature travel benefits such as:

• Trip cancellation insurance
• Lost luggage reimbursement
• Travel accident insurance
• No foreign transaction fees
• Auto rental coverage

Some credit cards go even further by offering features such as airport lounge access, rideshare credits, annual travel credits, credits toward TSA PreCheck or Global Entry application fees, elite status at various hotels and more.

The higher the annual fee, the better the benefits. Premium credit cards with high annual fees, like the Amex Platinum Card with a $695 annual fee and the Chase Sapphire Reserve® with a $550 annual fee, deliver a slew of high-end rewards to cardholders.

When a credit card offers the right combination of rewards and features, paying an annual fee — even one that may initially seem high — could upgrade your travel experience and save you money in the long run.

You’re rebuilding your credit and can afford to do so with a card that charges an annual fee

Some credit cards for people with bad credit charge annual fees, although there are exceptions. If your credit history limits your options, you might consider applying for a credit card with a low annual fee to help you build your credit until you qualify for a better card. One example is The Card with No Credit Check – The Secured Self Visa® Credit Card, which is geared toward people with poor or no credit history and charges an annual fee of $25.

Another option is a secured credit card, which requires an upfront security deposit to establish your line of credit. The benefit of these cards is that the security deposit is a one-time and refundable payment, while annual fees are recurring and nonrefundable. However, security deposits may require a bit more upfront cash. Many require at least $200, while annual fees for these cards typically remain under $100.

When it doesn’t make sense to pay an annual fee

Here are a few scenarios in which it may be prudent to steer clear of annual fee cards.

You don’t spend enough to make up for the cost of the annual fee

For every credit card that has an annual fee, there should be a threshold at which your spending allows you to recoup the cost. For example, if your card earns 2 percent cash back on all purchases and charges a $100 annual fee, you would need to spend $5,000 before your earnings offset the cost of the annual fee ($5,000 x .02 = $100).

If you were trying to stick to a budget of $500 per credit card bill, it would take you 10 months to earn $100 in cash back. In the remaining two months of the year, you’d earn $20 in cash back, meaning you only come out $20 ahead for the entire year. You wouldn’t be losing money, but you also wouldn’t be gaining much.

If you stuck to your monthly budget of $500 and instead used a card with no annual fee that earns 1.5 percent cash back on all purchases, you’d come out $90 ahead for the year ($6,000 x .015 = $90).

If you’re deciding between a card with an annual fee and a card without one, it’s worth doing some quick math to estimate your net earnings.

You won’t use the additional benefits that a card with an annual fee would provide

Card benefits and perks are sometimes harder to assign value to. Though many benefits, like free checked bags and airport lounge access have concrete monetary value, they’re worthless if you don’t use them.

For example, among other benefits, the Blue Cash Preferred® Card from American Express — which offers a first-year $0 intro annual fee for the first year, followed by a $95 annual fee — also offers a complimentary ShopRunner membership. This service offers free expedited shipping when you shop with select merchants. That sounds pretty great, but you should take the time to research the participating merchants. Do you shop often with them enough that free expedited shipping will be valuable? Then, decide whether you’re likely to remember to make your purchases through ShopRunner.

If your answer is no, then that benefit shouldn’t influence your decision. You might find the card’s rewards rates are high enough to justify the annual fee alone, or you might decide that it isn’t worth it and the Blue Cash Everyday® Card from American Express with no annual fee meets your needs.

You have credit card debt and can’t afford to add a card with an annual fee to your portfolio

Credit card rewards can be a nice bonus for people who can pay their statements in full each month. But if you’re working on paying down a credit card debt balance, it’s probably not a good idea to add another charge to the mix. The average credit card interest rate is around 20 percent, so it’s best to put every extra dollar toward paying down your debt before pursuing rewards on a card that carries an annual fee.

Your card’s features diminish after the first year

Some cards pack a lot of benefits into the first year, from boosted rewards rates and welcome bonuses to memberships with popular retailers. While these may offset the annual fee in year one, take them out of the equation to gauge value for the following years.

How to get your credit card’s annual fee reduced or removed

When you assess the credit cards in your wallet and decide that the annual fee isn’t worth it, you might think your only option is to close the card, but here are some other ways to handle it.

• Call customer service and ask whether they can waive the annual fee. Maybe they won’t, but it never hurts to ask.
• Maximize your rewards usage to offset the cost.
• Request to swap your credit card for one with no annual fee.
• If you’re a member of the U.S. military, ask if your military status could entitle you to a fee waiver.

How to cancel a credit card with a fee

If you’re considering closing your card, you can first try to request a retention offer through customer service. This can help keep the card in your wallet a little while longer. Because closing your credit card could negatively impact your credit score, it might not be the best step to take after realizing the annual fee isn’t worth it. So choosing to switch credit cards, get the fee waived or shift your rewards usage could make it more affordable without negatively affecting your credit score.

But if you’re certain you want to cancel a credit card with an annual fee, follow a few steps to ensure a smooth process:

• Pay off any outstanding balance. Do this before you cancel, as it will help you avoid additional interest charges or fees.
• Redeem any rewards or benefits. If your credit card offers rewards points, cash back or other benefits, redeem them before cancelling the card. Once the card is closed, you may lose access to any unused rewards.
• Contact the credit card issuer. Call the customer service number on the back of your card to cancel the card. Be prepared to answer security questions to verify your identity.
• Request confirmation in writing. After speaking with a representative, request written confirmation of the cancellation. This documentation can serve as proof that the account was closed at your request and can be helpful if there are any disputes or issues in the future.
• Properly dispose of the card. Once you have received confirmation that the credit card has been cancelled, properly discard the physical card to prevent any unauthorized use. Securely dispose of the card by shredding it to protect your personal information.

By following these steps, you can minimize any potential impact on your credit score or finances.

The bottom line

How much would you pay for a top rewards credit card? Less than $100 per year? $200? How about nearly $700? If you want to know whether a credit card annual fee is worth it, take a look at all the rewards and benefits the credit card offers. Then, ask yourself whether the value you would realistically get from those benefits will outweigh the cost of the annual fee.

If the annual fee feels too expensive, or if you’re uncertain about whether you’ll really use all the features the credit card offers, you might want to consider opting for a credit card with no annual fee.