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Do Credit Cards With Annual Fees Make Sense?


There are so many credit cards to choose from. It can be overwhelming picking between travel rewards, cash back options, and interest rates. But it’s just confusing to hear that some are free and other credit cards come with an annual fee. Does it make sense to pay for the privilege of using a specific card? We’ve got the answer.

For anyone just starting out on their credit journey, there is an abundance of great no fee credit cards available.  Most of the basic cards belonging to the big credit card companies come with no annual fee and some might even offer a small sign-up bonus($100-$300 range) after meeting a minimum spending requirement.

Which card you select and apply for though will depend on your credit score and spending habits.  Most people should have at least one no fee card in their wallet since they are great for establishing credit.  And whether you like it or not, credit is becoming more important in everyday life so it’s vital to establish credit early and spend responsibly.

Low Entry Barrier to No Fee Cards

One of the best aspects of no fee credit cards is that the approval requirements are not very strict.  Even if you have a limited credit history or poor credit, you still have a good chance of getting approved for these types of card.

Since the length of your credit history makes up 15% of your credit score, it’s important to have cards in your wallet that are very old.  That way, the impact of applying for a new card will be less severe.

Since your first credit card will probably have a very low limit, one of the easiest ways to get a higher limit is to apply for another card.  In this scenario a lot of people might think it makes sense to cancel your old card. But you should actually keep it around in order to take advantage of its age.  Here’s an example:

Joe the plumber has a credit card with a $500 limit that is 10 years old.  He applies for a new card and is approved for a $5,000 limit.  Since Joe kept his first card, the average age of his accounts only drops to 5 years.  If he would have canceled his first card, and then applied for his second card, his average account age would have gone down to 0 years before and after applying.

Annual Fees Aren’t as Bad as They Seem

In personal finance, we generally try to avoid fees.  Credit cards are no different, but there are a lot of cards that will make it worth your while to pay the annual fee.  Annual fee cards tend to offer better sign-up bonuses ($300-$500 value range), better benefits/customer service and sometimes even annual bonuses.

The only caveat to these cards is that you’ll need to have good (675+) to great (725+) credit in order to get approved.

Avoiding the Fee

A lot of companies will offer the same card in a fee and no fee version.  Most people are turned off by annual fees but here are some tips you can use to offset the fee:

  • Get the Fee Waived – After your annual fee hits, call in and ask about getting the fee waived.  If you threaten to cancel, most companies will offer to waive the fee in the form of statement credit or even points.
  • Sign-Up Bonus Covers the Fee – Since credit card companies tend to offer much better sign-up bonuses for annual fee cards make sure to calculate how much the sign-up bonus is worth and see how many years it would cover the annual fee for.  That way, you can essentially get a great card loaded with great benefits completely free for a few years.
  • Annual Bonus – Some cards that charge annual fees will reward you for holding onto the card with an annual bonus.  Often times, the bonus may be worth more than the annual fee like with the Chase Hyatt Visa.  The annual fee with that card is only $95, but you get a free night at any Hyatt Category 1-4 worldwide every year- just make sure you use it!

Ultimately, it’s up to you to decide if the annual fee makes sense or not.  But remember, the credit card industry is a very lucrative business for the credit card companies because so many people spend irresponsibly.  Make sure that you pay off your statement in full every month and never spend more than you have in your bank account.  That way, you can turn the tables on the credit card companies and take advantage of all the great offers and benefits that are ripe for the taking.

Photo Credit:  alexromero3