Credit Card Basics

What Is an Annual Fee on a Credit Card?

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You're considering applying for a new credit card—and then you notice the card has an annual fee. Should that be a deal-breaker? Not necessarily. An annual fee on a credit card is a fee you pay each year simply for having the card, whether you use the card or not.

With plenty of credit cards available that don't have annual fees, why would anyone pay one? Sometimes a card that charges an annual fee is the best (or only) option for you, despite the cost. Keep reading to find out why some credit cards charge annual fees and how to decide if a card with one is worth the cost.

Why Do Credit Cards Charge Annual Fees?

Credit cards that charge annual fees usually fall into one of two categories: credit cards for people with bad credit and credit cards that offer rewards.

Credit Cards for Bad Credit

Credit cards designed for people with poor credit often charge annual fees. Credit card issuers know that if you have bad credit, you're more likely to have a history of making late payments, missing payments or defaulting on your debt altogether. They're taking a risk by extending you credit despite this behavior; in exchange for assuming the risk, they may charge an annual fee.

In some cases, credit card issuers charge an annual fee simply because they can. People with bad credit have fewer options for getting credit, and many credit cards available to them carry high interest rates and fees, including annual fees.

But just because you have bad credit doesn't mean you're destined to pay an annual fee for a credit card. In most cases you can find credit cards for people with poor credit that don't charge annual fees. A secured credit card might be one option, although you'll have to put down a security deposit to get one.

Rewards Credit Cards

Some credit cards charge an annual fee in exchange for generous cardholder rewards. In many cases, the potential value of the rewards far exceeds the cost of the annual fee. For example, rewards credit cards typically offer cash back on purchases or points that can be redeemed for travel miles or hotel stays—and often include benefits such as 24/7 travel assistance or purchase protection on items you buy with the card.

If you're smart about using a rewards credit card, you can maximize your rewards and more than offset the cost of the annual fee. The key is to find a rewards credit card that's a good match with your spending behavior and offers rewards that you'll actually use. For instance, if you travel several times a year, a rewards card that offers travel points could be worth the annual fee. If you rarely leave your hometown, however, paying an annual fee for a travel rewards card wouldn't make sense; a card that gives you cash back on grocery purchases might be a better fit.

When Are Annual Fees Charged?

When you get a credit card with an annual fee, it's important to know when the fees will be charged to your account. Some credit card issuers will waive your annual fee for the first year, but in most cases the fee is due when you first open your credit account and every year thereafter on that anniversary date. The annual fee will be added to your account balance automatically, so even if you don't make a purchase right after opening your account, make sure to pay your first bill on time. That way you'll avoid getting charged interest on the annual fee, or worse, ignoring it and missing a payment altogether.

Do All Credit Cards Have an Annual Fee?

Not all credit cards have an annual fee. In fact, many good ones don't. Whether you're looking for a rewards credit card or a card for bad credit, you can find quite a few cards that don't charge an annual fee.

The Citi® Double Cash Card from our partner, for example, offers plentiful rewards and charges no annual fee. You'll get 2% cash back on every purchase you make—1% at the time you make the purchase and another 1% as you pay for those purchases—with no limit on how much cash back you can earn. The card also has an introductory 0% annual percentage rate (APR) promotion on purchases and balance transfers for 9 months, which can save you quite a lot in interest if you frequently carry a balance or want to transfer a high interest balance to the Citi® Double Cash Card from another card. As a Citi credit card holder, you'll get VIP perks including special access to thousands of events. Use the card to buy presale tickets to concerts, sporting events, elite dining experiences and other exclusive events.

The Discover it® Cash Back card, another card with no annual fee, offers some of the most generous cash back rewards you'll find. You'll earn 5% cash back on up to $1,500 of purchases in categories that rotate each quarter once you activate, plus 1% cash back on all other purchases. New cardholders will receive a hefty bonus: At the end of your first year, Discover automatically matches all the cash back you've earned—with no limit—effectively doubling your cash back rewards. There's also a generous 14-month introductory 0% APR on purchases and balance transfers, which means this card can save you a bundle on interest if you carry a balance or need to transfer a balance.

Are Annual Fees on Credit Cards Worth It?

You shouldn't write off a credit card just because it charges an annual fee. Instead, do your homework to determine whether that card is a good fit for you, what other non-fee cards are available to you, and whether the annual fee is worth the cost.

If you have bad credit, do some research to see what kinds of credit cards you can qualify for. Don't assume you're limited to credit cards that charge annual fees. People with bad credit can choose from secured credit cards, which require you to put down a refundable security deposit, and unsecured credit cards, which don't require a deposit.

Unsecured credit cards designed for people with bad credit generally charge annual fees. One exception is the Petal® Visa® Credit Card, which doesn't have an annual fee and offers cash back rewards. You'll likely find more secured credit cards that don't charge annual fees. Although you have to make the security deposit upfront, the deposit reverts back to you if you close the account. If you can afford to put down a deposit, this could be a good option if you know you don't want to pay an annual fee on your credit card.

If you have good credit, you have many more options—including rewards credit cards. It may make sense to pay an annual fee for a rewards credit card if the card's perks, rewards or benefits outweigh the annual fee.

Some rewards cards make it easy to attach a dollar benefit to the rewards to see if the value of the rewards offsets the annual fee. For example, the Chase Sapphire Preferred® Card charges a $95 annual fee but offers a sign-up bonus worth $750 in travel or $600 in cash if you spend $4,000 on purchases in the first 3 months from opening your account. If you expect to spend that much on the card, the value of the bonus you earn is enough to pay the annual fee six or seven times over.

For other rewards credit cards, the value of the rewards isn't so easy to quantify. For instance, if you travel a lot, you might decide it's worth paying an annual fee to get a card with benefits such as trip cancellation insurance, 24/7 overseas travel assistance or auto rental collision waiver coverage. You may never need to use any of these benefits, but just knowing they're there can provide priceless peace of mind. If you're a music lover or sports fan, you might be willing to pay an annual fee for a rewards card that offers presale tickets to hot concerts and sporting events or gives you access to exclusive, cardholder-only events like dinners hosted by famous chefs.

When you're considering a rewards credit card that charges an annual fee, be sure to take into account any other fees the card charges, such as late fees or penalty fees. Also consider the APR: If you regularly carry a balance on your credit card, high interest charges could end up costing you far more than the value of any rewards you earn.

If you do choose a rewards card that has an annual fee, be sure you know what you need to do to maximize the rewards. After all, you want to get your money's worth, which may require registering for rewards, making specific types of purchases at a certain time of year or making purchases through the credit card's website or partner websites. Read the fine print and follow the rules to get the most from your rewards.

To Fee or Not to Fee?

Depending on what you want from a credit card, a card that charges an annual fee may be worth the cost. But before you rush to apply for a card with an annual fee, do your homework to see what else is out there. (You can get a free FICO® Score from Experian first so you'll have a better idea which cards you can qualify for.) Whether you're seeking rewards points and cash back or want a credit card that will help you rebuild your credit, you can find options both with and without annual fees. Take the time to weigh all the costs and benefits of each credit card you're considering so you can feel confident you're choosing the right card for you.