The content is accurate at the time of publication and is subject to change.
We all love credit cards with big rewards and various perks. However, higher rewards rates or great perks often mean high annual fees - in some cases, over $600 - and paying a credit card annual fee might not be worth it for everyone.
Credit card companies make money on fees, which include the annual fee, interest charges (that snowball when you do not pay off the card balance in full), late payment fees, and some other fees. The annual fee is also used to offset the cost of offering cardholders rewards and additional perks, like annual travel credits or various insurances. Oftentimes, the more perks you receive, the higher the annual fee will be. Therefore, it's important to understand whether you will be using all those perks or wasting your money.
The annual fee is usually charged during the same month that you sign up for the card and then every 12 months after that. You will see your annual fee on your credit card statement once per year as a lump sum charge. Sometimes annual fees are waived for the first year and very rarely can be divided into monthly installments, payable along the same lines as the card's billing cycle.
Here is how to figure out if it is worth paying an annual fee for a credit card:
- Understand how confident you are with managing the credit cards you already have. If you've just started your credit journey and you aren't sure you can use credit cards responsibly, start out with a secured credit card or a student credit card. Once you are a responsible and confident credit card user, you can consider moving on and applying for a credit card with rewards or even with additional perks.
- Consider if the perks actually matter to you. Credit cards may be loaded with perks, but if you do not care about them, then why would you waste your money and time? If you do not travel much, then it doesn't make sense to pay for a credit card that offers free checked bags, airport lounge access, or hotel credits.
- If the perks make you change your lifestyle in order to take advantage of them, look for a different card. Some credit cards may offer lucrative bonuses or credits and if you need to spend more than you usually do to qualify for the bonus, you may end up with extra debt. Consider how much you typically spend in a month and what part of your spendings you can put on a credit card. Then calculate whether you can get that bonus through your standard living and spending habits and how quickly you will recoup the card's annual fee.
- Calculate how much value you get back for paying the annual fee. If you are going to use all credit card benefits throughout a year, see if they outweigh the card's annual fee. For example, if a card comes with free lounge access, it may be enough to offset the annual fee.
A credit card with an annual fee is worth it if it pays for itself through the perks and benefits you will actually use. Otherwise, getting a no annual fee credit card will be more beneficial. If you already use a credit card with an annual fee and it's no longer comfortable for you to pay for it, you can ask the issuer to downgrade your card to an alternative card with a lower or no annual fee.
