Annual Fee Explained: Should You Pay It?
There’s usually no reason why you should pay an annual fee for a credit card, and most people prefer not to. This is especially true since the start of the economic downturn caused by the COVID-19 pandemic. However, there are times when the charge is actually justified, and when paying that fee can get you considerable rewards and benefits. But identifying those instances isn’t always easy. Keep reading to find out everything you need to know about this topic.
What is an Annual Fee?
An annual credit card fee is automatically charged to your account by your credit card provider, enabling you to keep using the card. Current annual credit card fees with some of the major credit card issuers are:
- American Express: $0-$250
- Bank of America: $0-$95
- Capital One: $0-$95
- Chase: $0-$550
- Citibank: $0-$450
- Discover: $0
- Wells Fargo: $0
As you can see, these fees can vary significantly depending on the issuer and chosen credit card. Aside from these charges, you may also encounter:
- Cash advance fees: Getting a cash advance is like taking out a short-term loan at a bank or ATM. The credit card cost for this service is usually around 3 to 5% of the borrowed amount.
- Interest fees: Interest fees are charged when you don’t pay your entire credit card bill each month. The average interest rate is around 18% for new offers and 15% for existing accounts.
- Foreign transaction fees: Whenever you make a purchase that goes through a foreign bank or is in a currency other than the USD, you’ll have to cover a foreign transaction fee, which is typically 3% of each transaction.
- Returned payment fees: This fee is charged if, for instance, your annual payment bounces due to insufficient funds in your account. It should amount to anywhere between $20 and $40.
- Balance transfer fees: You’ll incur this fee when you transfer debt from one lender to another, and it most often equals 3% to 5% of the transferred amount.
- Over-limit fees: This is the cost of breaching the credit limit on your card. The first time you do so, the penalty shouldn’t exceed $25. It goes up to $35 if you exceed your credit a second time within six months.
- Late payment fees: A late fee of approximately 1% to 1,5% of the overdue amount is often imposed on cardholders that fail to take care of their financial obligations by the due date.
Why Do Credit Cards Have Annual Fees?
Credit cards that have a yearly fee provide you with air miles, travel perks, cashback, and various other kinds of rewards. Seeing as these bonuses and benefits are costly, card issuers have to charge a fee in order to make up for some of the expenses.
This fee can go up to thousands of dollars, but if you have a good credit score, you should be able to get a pretty good deal. That said, while choosing a credit card, you should always carefully review the rates and fees before agreeing to anything.
When Do You Pay the Annual Fee For a Credit Card?
Most credit card issuers follow a simple set of rules when it comes to charging you the yearly fee. The fee is billed once during the same month each year, and the month is usually the anniversary of when you got the card. For example, if you opened the card in May, you should expect the bill in May of every upcoming year.
In some instances, the card issuer may divide the fee into several monthly installments, but this is quite uncommon. Card issuers can also deduct the annual payment from your available credit limit.
When Does Paying the Annual Fee Make Sense?
Finally, we’ll go over a few instances when paying the yearly charge is justified.
You’ll come across a number of credit card issuers that offer exceptional rewards meant to incentivize you into opening an account with them. Typically, these rewards include a large amount of statement credit or enough frequent flyer miles to get you to your desired destination and back. Sometimes you might even get points that you can exchange for gift cards.
If you tend to travel a lot, whether it’s for pleasure or business, you could end up saving quite a bit by paying an annual charge on a card with ongoing travel benefits. The most useful are those that provide you with free hotel stays.
There are plenty of cards that offer a small cashback on all purchases each month, but unless you go on a shopping spree every single day, you don’t really need that. The trick is to find a card that allows you to get a solid amount of your money back for essential items such as groceries.
If you have a low credit score, you’ll most likely not be eligible for credit cards with no annual fee, but that doesn’t mean that you shouldn’t get a card. Opening a new card can positively impact your credit score since it increases your available credit. By paying the yearly fee on time, you’ll also show any potential lenders that you’re financially responsible.
Those that are in a really tough spot should consider getting a secured credit card. These are easy to qualify for because they require a refundable security deposit.
In some situations, paying a yearly fee can be worth the rewards and perks that you get in exchange. A large sign-up bonus, frequent flyer miles, free hotel stays, and cashback are some of the most common benefits of owning a credit card with a yearly charge. Another reason why people get this kind of card is to boost their credit score so that one day they can get a card without these fees. Read our guide if you still don’t have an answer for the most obvious question: “What is an annual fee anyway?”
The answer to this question depends on your current finances, spending habits, and credit score – all of which are highly prone to change. According to Experian, an average millennial has around three credit cards, while baby boomers typically have four or more. If you don’t want to risk going into debt by overspending or paying too many fees, our recommendation is to limit yourself to no more than three accounts.
If you’re not using credit cards with an annual fee, you should consider closing them to avoid unnecessary charges. However, if there’s no regular fee, it might be a good idea to keep the account open since your credit score will benefit from a long credit history and a large amount of available credit. Know that this tactic isn’t bulletproof as card issuers often close inactive cards, which can result in a credit score drop.
There are several ways to avoid paying annual credit card fees, but the most common ones involve canceling the credit card 30 to 60 days before the yearly payment is due or simply asking your card issuer to waive it – some will agree to do so in order to keep you as a customer.
For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.
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