Should You Ever Pay a Credit Card Annual Fee?
January 29th, 2007 by David Weliver
If you’re like me, you have probably been tempted by the miles rewards credit cards like the Citi AAdvantage Card or the Gold Delta SkyMiles Credit Card. The bonus miles you receive upon approval alone might be enough to bump your next cross-country flight to first-class. Never mind the miles you’ll rack up for everyday purchases and business travel. But what about that annual fee, which can range from $30 all the way up to $395?
A credit card annual fee used to be a necessary evil – the price you paid to get anything from your credit card other than the privilege of deferring payment for 30 days (hopefully no longer). But today cards like the The Miles Card from Discover® Card or Blue Sky® from American Express offer rewards for purchases without an annual fee.
What exactly, does the annual fee buy you?
Slightly “better” rewards, to be exact. The difference between the Citi Premier Pass (no annual fee) and Premier Pass Elite ($75 annual fee)? Both cards get you one point for every $1 spent and extra miles for every mile flow. The Elite Card gives you double points at select gas stations, supermarkets, and drug stores and gives you the option of getting a free companion airline ticket with every fare $299.00 and over. The enrollment bonus varies, also; Elite card members will score an additional 10,000 bonus miles.
In the Citi Primer Pass example, it’s obvious that if once a year you would use the free companion airfare feature, you would save more than the $75 annual fee. What about other cards? For purely points-based programs, ask yourself how much spending (and how much free flying) you’ll do.
The value of credit card points varies depending on how they are redeemed, but we can assume they are valued at about one cent each. If you earn 1 point for every $1 spent and spend $25,000 you may have a free ticket worth about $500. Definitely worth an annual fee of $75. But do you charge at least $2,000 a month on your credit card? Probably not. If you only charge $500 a month, you’ll have 6,000 points at year’s end, worth about $60. You’ll have ended up loosing $15 to the annual fee.
Of course, this example assumes you pay off your balance in-full every month. If you don’t, forget the annual fee, any rewards you’re receiving will be eaten away by finance charges. For this reason, credit cards with annual fees tend to have high interest rates. If you’re looking for a credit card to carry a balance, never pay a fee! Check out my article on credit card balance transfers for some tips.
Want to get the perks of an annual fee credit card without paying up? You have a couple of options. Most cards offer the first-year fee-free. You should be able to apply, use the card for a year to rack up the points, and cancel before the fee comes due. Just remember that both opening a credit line and cancelling one put a slight ding in your credit score. The other route? Call up your card company and ask to waive your fee. It may not work with all cards, but most companies want to keep your business and will make concessions if you ask.
Looking for a no annual fee rewards card? Check out my credit card reviews or check out Blue Sky® from American Express, Chase Flexible Rewards Platinum Visa® Card, and The Miles Card from Discover® Card all offer 1 mile for every dollar spent, no blackout dates, and a zero or low introductory APRs.
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