Today, annual fees on credit cards are nothing like as common as they once were. Maybe as few as one in four products still charges them. So, given so many free options, why would anyone choose to pay? There are three main circumstances when it might be the smart move.
1. When You're Going to Get Better Rewards
Some plastic offers richer rewards if you pay an annual fee than you'd get for a similar, free product. Deciding which of those two cards to choose involves some simple math: Are the additional rewards miles, points or cash back you're going to get worth more than the fee? Let's look at a real-life example.
The Blue Cash Everyday® Card from American Express has no annual fee, while the Blue Cash Preferred® Card from American Express levies one of $95. Choose the former and you get a one-time $100 statement credit as a sign-up bonus -- providing you spend $1,000 in purchases on your new Card within the first 3 months. Opt for the second, and you get $150 statement credit.
But the big difference comes with rewards. Pay that annual fee, and you get 6 percent cash back on the first $6,000 you spend at U.S. supermarkets each year (then 1 percent), and 3 percent on unlimited purchases at U.S.gas stations and many U.S. department stores. All other purchases earn you 1 percent. Avoid that fee, and you get only 3 percent cash back on your first $6K spent at U,S, supermarkets (then 1%), and 2 percent for U.S. gas station and U.S. department store purchases. Again, everything else gets you 1 percent. So, assuming you spend $6,000 a year in supermarkets, you'll earn $180 more ($360 p.a.) with the fee card, because you'll receive just $180 p.a. with the non-fee one. That means you'll already be making $105 a year profit by paying the fee, and the extra you earn at gas stations and department stores is icing on the cake. Of course, if you don't spend that much in supermarkets, you're going to need a calculator to work out the fee's breakeven point for your personal spending patterns.
2. When You're Going to Get Better Perks
The highest annual fee you're likely to be asked to pay for a mainstream credit card is $495. Most of us would think that a ridiculous amount, but people do pay it. So what do they get?
Well, The Black Card from Visa is one that charges that much -- plus $195 p.a. for each authorized user. You'd need to live a time-poor and cash-rich lifestyle to justify such an expense, but it's not a bad buy for those who do. One of its big selling points is its 24/7 concierge service, which recommends restaurants and other leisure venues and makes reservations, as well as sourcing gifts and goods for you and providing a host of other services. But some may value more the "VIP treatment" Black cardholders are offered at 3,000 properties (presumably hotels and resorts), and the unlimited visits to "VIP airport lounges," in the words of the card's website. It's only a guess, but the team marketing this card may be trying to appeal to people who like to think of themselves as VIPs.
If you spend a lot of time traveling -- and you can afford it -- those perks may easily justify the $495 a year they'll cost you. Of course, most cards with annual fees charge and offer a lot less. It's really up to you to decide whether to pay a fee or perks, and, if so, to conduct your own cost/benefit analysis.
3. When You Need a Secured Credit Card
Secured credit cards are about as far away from Visa's Black Card as you can get. They're different from mainstream "unsecured" credit cards because you usually don't get "real" credit -- instead depositing money with the card issuer to protect it in case you default. The line between these and prepaid cards is gradually blurring, but they're often good for people who've been through financial disasters, who no longer qualify for other forms of plastic, and who need a card or want to rebuild credit. If they prove themselves good customers, secured-card issuers will often upgrade them to an unsecured credit card (one with a credit line), sometimes quite quickly.
Re-establishing your credit is rarely cheap or easy, and many secured credit cards charge annual or monthly fees. But they could be well worth it if they help you build your credit score. Just watch out for the one or two sharks that swim among the companies that offer them.
Some people hate annual fees, and refuse to pay them on principle. But they're not always a bad thing. You just need to make a cool calculation about whether the benefits they bring are, in your circumstances and with your lifestyle, worth the money.
Disclaimer: This content is not provided or commissioned by the credit card issuer. Opinions expressed here are author's alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This content was accurate at the time of this post, but card terms and conditions may change at any time. This site may be compensated through the credit card issuer Affiliate Program.