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. 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.

Annual Fee Explained

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 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 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.

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.

Cards with generous signup bonuses

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.

Cards with constant travel perks

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.

Cards with a great cashback percentage

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.

Cards for individuals with bad credit

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.