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While shopping for a new credit card, you may have found options with an annual fee. Before clicking "submit" on the application, you may wonder: Does it make sense to sign up for a card with an annual fee? The answer depends on the card perks and your spending habits. Cards with an annual fee can be beneficial, but only if the value you get from the card offsets the cost.
Read on to learn more about how much card companies might charge for an annual fee and when paying one could make financial sense.
How Much Do Credit Card Annual Fees Cost?
The cost of a credit card's annual fee can vary greatly from one card to the next. Some credit cards have no annual fee, while others may charge $39 to $95 per year. Credit cards that come with premium benefits and travel perks may carry a much higher price tag of $250, $550 or even $995 per year.
Cards with higher annual fees may offer extra bells and whistles like access to an exclusive airport lounge, hotel upgrades and introductory rewards bonuses. In essence, you get what you pay for.
Why Do Credit Card Issuers Charge Annual Fees?
Companies may charge an annual fee for certain cards that provide generous cardholder benefits, like travel credits, exclusive rewards opportunities or free checked luggage on flights. You generally pay more per year for the cards that come with the most perks.
Another time a credit card may have an annual fee is if it's geared to borrowers with fair or poor credit. Interest rates for these types of cards may also be high. The good news is that after building credit with the card you may be able to qualify for a card that has a lower fee (or none at all) and a better interest rate.
When You May Want to Pay an Annual Fee
Before automatically ruling out a credit card that has an annual fee, it's worth doing some math to see if you can benefit from the card despite the fee. If the value you get from the card's rewards and other benefits exceeds the annual cost, paying the fee could be worthwhile. Here are some scenarios in which it could make sense to pay an annual fee:
If a card has a high-value rewards offer or introductory bonus, you may earn enough to cover the fee and still see some upside.
For example, the Credit One Bank American Express® Credit Card has a $95 annual fee, but there's an opportunity to earn even more in cash back. Cardholders can earn 5% cash back on the first $5,000 spent on gas, groceries, cable, internet, cellphone service and satellite TV each year. That's $250 in potential cash back for that category, plus you can earn an extra 1% cash back on everything else. If you shop heavily at the grocery store and commute by car daily for work, you may easily earn enough cash back to cover the card's $95 fee and still make a profit.
Another example, the Chase Sapphire Preferred® Card, allows you to earn a generous intro bonus of 100,000 bonus points if you spend $4,000 in the first 3 months you have the card. That's worth $1,250 when redeemed for travel through Chase Ultimate Rewards, which is more than enough value to cover the card's $95 annual fee.
A card with an annual fee might offer savings opportunities in the form of its benefits. At first, you may balk at the $550 annual fee you'd pay with the Chase Sapphire Reserve®, but it's one of the most popular travel credit cards for a reason.
First off, the credit card offers you a $300 travel credit each year. Plus, you can get complimentary access to VIP airport lounges (through Priority Pass Select after enrollment), 1:1 point transfers to other loyalty programs and a credit every four years or 4.5 years to pay for Global Entry or TSA Precheck.
After you earn the $300 travel credit, you can earn 5 points per dollar spent on flights and 10 points per dollar on hotels and car rental bookings through Chase Ultimate Rewards. In addition, the card offers another 3 points per dollar on other travel bookings and 3 points per dollar on dining, including takeout. There may be lots of opportunities to receive credits and earn rewards to offset your annual costs.
Help Building Credit
As mentioned, credit cards geared toward borrowers with limited credit or poor credit may also have annual fees. While paying an annual fee may not be ideal, opening up a card with an annual fee and using it to build credit could have long-term advantages.
Before opening up a credit card, be sure to compare rates and fees to see where you can get the best deal. Then after opening up the card, try to pay off the entire balance each month because it'll help you avoid interest. Otherwise, paying an annual fee on top of interest charges each month can get pretty expensive.
How to Get Your Credit Card's Annual Fee Waived
In some cases, credit card companies will waive the annual fee for the first year as a new cardholder incentive. If you're an existing cardmember and an intro offer isn't on the table, you may be able to call your card issuer to request a one-time waiver.
Compare Cards Before Applying
Whether paying an annual fee for a card makes sense for your budget depends on your spending habits and the benefits the card provides. If you rarely travel and barely use a credit card, choosing one with an annual fee may not be worthwhile since you may not see enough benefit to justify the fee.
On the other hand, if you spend heavily in a certain shopping category and a credit card rewards you for it, paying an annual fee for premium perks and rewards opportunities could work out well for you.
Before choosing a card, it's always a good idea to compare rewards programs to land on the right card for your situation. If you're looking for a good place to start shopping around, you can get personalized credit card offers that won't affect your credit score using Experian CreditMatch™.