Credit card annual fees can add to your expenses, but if you’re leveraging the right card, the benefits often outweigh the costs. Annual fee credit cards, whether for travel, rewards, or credit-building, frequently offer superior perks and reward rates compared to those without annual fees.
What Is a Credit Card Annual Fee?
An annual fee is a yearly charge for holding a credit card, typically billed around the anniversary of your account opening or on the last day of the month you were approved. Fees range from less than $50 for basic cards to over $600 for premium cards with luxury benefits. Here’s what you should consider before opting for a card with an annual fee.
Why Consider a Card with an Annual Fee?
Cards with annual fees often provide enhanced rewards and perks. For instance, travel credit cards with higher fees usually offer valuable benefits like travel credits, airport lounge access, transfer opportunities to hotel or airline partners, and extensive travel protections. Similarly, rewards cards with annual fees often have higher reward rates and better redemption options compared to their no-fee counterparts.
Conversely, some cards charge an annual fee but offer limited rewards or benefits, typically targeting individuals with lower credit scores. In these cases, the fee may be justified by the opportunity to build credit. If you can only qualify for a card with an annual fee, it might be worthwhile temporarily until you qualify for cards without fees.
Evaluating the Rewards Against the Fee
Paying an annual fee adds an extra expense, but some cards’ rewards and credits can more than cover this cost. For example, the Blue Cash Preferred® Card from American Express charges a $95 annual fee but offers:
- 6% cash back at U.S. supermarkets (on the first $6,000 spent per year, then 1%)
- 6% for select U.S. streaming subscriptions
- 3% at U.S. gas stations and on transit
- 1% on other purchases
In comparison, the no-annual-fee Blue Cash Everyday® Card from American Express earns:
- 3% cash back at U.S. supermarkets (on the first $6,000 spent per year, then 1%)
- 3% on U.S. online retail purchases (on the first $6,000 spent per year, then 1%)
- 3% at U.S. gas stations (on the first $6,000 spent per year, then 1%)
- 1% on other purchases
With an average household spending $5,259 annually on groceries, the Blue Cash Preferred earns $220.54 after accounting for the annual fee, compared to $157.77 with the Blue Cash Everyday.
Annual fee cards often provide greater flexibility in redeeming rewards compared to no-fee cards, which usually limit rewards to cash or statement credit. For instance, travel cards with annual fees can offer more versatile reward programs, including point transfers to airline and hotel partners.
Budgeting for the Annual Fee
Consider if your spending habits justify the annual fee. For instance, if a card with a $95 annual fee earns 3% cash back, you’d need to spend $3,200 annually to cover the fee with cash back rewards. In contrast, a no-fee card earning 2% cash back would only require $3,200 in spending to earn $64, which is more straightforward.
If you spend over $10,000 annually, the card with a higher annual fee may provide better rewards. Assess your spending patterns to determine which card offers the most value for you.
Valuing the Benefits
Typically, higher annual fees come with better benefits. For example, The Platinum Card® from American Express has a $695 annual fee but includes:
- Up to $200 airline fee credit for incidental travel fees
- Up to $200 hotel credit for select bookings through American Express Travel
- Up to $240 digital entertainment credit
- Up to $155 Walmart+ credit
These credits total up to $795, potentially covering the card’s annual fee if fully utilized. However, if you don’t frequently use the benefits or travel, you might consider less expensive options.
Welcome Bonuses
Many cards with annual fees offer substantial welcome bonuses. For example, the Chase Sapphire Preferred® Card, with a $95 annual fee, offers a bonus of 60,000 points for spending $4,000 in the first three months, potentially worth $750 in travel. In contrast, no-fee cards like the Capital One VentureOne Rewards Credit Card offer smaller bonuses. While bonuses can offset annual fees, ensure you can meet the spending requirement without overspending.
Military Members and Annual Fees
Active military members can often have annual fees waived due to the Servicemembers’ Civil Relief Act and the Military Lending Act. Issuers like American Express, Chase, Capital One, Citi, and U.S. Bank provide this benefit. Check with your card issuer for details if you’re a service member.
Building Credit
For those with limited or imperfect credit, an annual-fee card might be necessary to build credit, although it’s preferable to explore no-fee options first, like secured cards. The Discover it® Secured Credit Card, for example, has no annual fee and offers rewards, making it a solid choice for credit building.
The Bottom Line
To decide if a credit card with an annual fee is right for you, consider:
- Can the rewards justify the fee?
- Does the fee fit within your budget?
- Are the card’s benefits valuable and usable?
- How does the welcome bonus factor into the overall value?
- Are there better, no-fee options for credit-building?
Choose a card where the rewards and benefits outweigh the annual fee, ensuring it aligns with your spending habits and financial goals.
