why do credit cards have annual fees?
When shopping, you want to make sure you’re getting the most for your buck. And for those who pay using a rewards credit card, that could mean points or miles to redeem for free travel, cashback, and merchandise every time they swipe their card. to set a distance But great perks often come with high annual fees — and paying the fee may not be worth it for everyone.
choose why credit cards have annual fees? how the fee is paid? and questions to help you decide whether the card will be worth it to you.
Why do credit cards have annual fees?
Credit card companies make money on the charges they charge customers, which include annual fees, interest charges that go up when you don’t pay your bill in full each month, and interchange fees that businesses charge each time. Pay by swiping your card.
However, the annual fee also offsets the cost of offering cardholders rewards and additional perks, such as annual travel credit or car rental insurance. And in many cases, the more benefits you receive, the higher the annual fee.
How is the annual fee paid?
The annual fee will appear on your credit card statement as a one-time fee once a year. You are charged
during the same month you sign up for the card and every 12 months thereafter. You will pay the annual fee the same way you would for regular purchases shown on your statement.
How to know if a credit card with an annual fee
An annual fee is worth it. paying for there are a lot of credit cards with attractive perks.
For example, right now the Chase Sapphire Preferred® card is offering new customers 60,000 bonus points when they spend $4,000 in the first three months after account opening (that is, for travel booked through the Chase Travel Portal). $750), a complimentary DoorDash DashPass membership for one year (active through March 31, 2022), 5X points on travel purchased through Chase Ultimate Rewards®, 3X points on dining and all other travel purchases, rentals 2X points on car insurance, travel delay protection and more.
Benefits of your credit fee
This basket of benefits will cost you $95 per year. The annual fee may very well be worth it for some people, but not for others. Here are some questions to ask yourself to find out if the annual fee is worth the expense:
- How confident are you about managing the credit cards you already have?
First and foremost, honestly ask yourself if you are a responsible and confident credit card processing user. Some cards with higher perks and higher annual fees can have many moving parts that involve more than just paying your bill on time each month.
Depending on the card you choose, you may have to spend in certain categories to receive bonus points. With bonuses cards, you’ll need to follow the issuer’s steps to maximize your point redemption.
which can sometimes be confused. Also, you must take additional steps to ensure that any insurance benefits or membership discounts are active. Doing all of this work in itself to take full advantage of the benefits of the card can seem overwhelming.
If you’re just starting your credit journey, and you don’t believe.
You can use credit responsibly, try using a standard secured card or a student card. first, get used to becoming a trustworthy credit user. Start with.” Tara Falcone, a certified financial planner and founder of the financial literacy program Recep. “Once you’re sure you can handle credit responsibly, you can look for cards with additional perks.”
Is it worth paying an annual fee for a credit card?
Here are some of the most common reasons why you might want a card with an annual fee:
Bad or limited credit history: You don’t have the best credit history, so you may have to settle for a card with fees designed for bad or limited credit.
Compensate Fees With Spending Rewards: You’ll spend enough to offset the annual fee, earning more rewards than you can afford with a no-fee card.
A huge introductory bonus: It has a huge signup bonus for spending a certain amount of money in the first few months of account opening.
Valuable Travel Perks: Have the travel benefits you want, such as free hotel stays, airport lounge access, or membership in hotel and airline loyalty programs.
Special Card Features: It has a special feature you need, like the ability to transfer points (Chase Sapphire Reserve® (Review) is a great option for that).
A downgrade path (product change): Some cards allow you to downgrade to a lower version with the same account history and credit line with fewer rewards and benefits.
Poor or limited credit history
If you have poor, limited, or no credit, your card options will be limited. Some credit card companies issue cards with an annual fee as a way to help you build or rebuild your credit.
These cards don’t come with great rewards or benefits, but they do give you a chance to establish a positive payment record on your credit report. Don’t expect to be showered with points or receive valuable travel perks, as they aren’t the most exciting cards. They are there to help you get your credit on track.
A secured credit card is a type of card designed to build good credit. They require a security deposit when you’re approved, which will fund your credit limit for the card. Some secured cards have an annual fee in addition to this deposit, although there are many that do not.
Why would you pay the fee when there are other options?
You might want to do this because the card you are looking at offers some special features that you need. The Citi® Secured MasterCard® (Review), for example, allows you to apply and fund your deposits without a bank account if you apply at an actual Citibank location.
There are regular, unsecured credit cards with annual fees for those without the best credit. A good example is the Capital One QuicksilverOne Cash Rewards credit card (Review), which has an annual fee of $39. It’s a pretty simple rewards card, but issuer Capital One designed it.
It is for people with near-average credit (you could also be approved with a bad credit score, depending on other factors).
And, of course, you can also find unsecured cards with no annual fee for average credit. But you may have a more difficult time getting approved for these than cards with fees.
Replenish annual fees with expense rewards
Cards with annual fees offer better spending rewards than cards with no fees — that is, more cashback or points per dollar. But that doesn’t mean they’ll always be more beneficial overall.
This can make a big dent in your profits, depending on how much you’ve spent on the purchase.
There’s an easy way to compare the value you get from different cards at different spending levels. Consider these two hypothetical cash back cards:
Card A has an annual fee of $100 and offers 2% cashback for all purchases
Card B has no annual fee and offers 1.5% cashback for all purchases