Is It Worth Paying An Annual Fee For A Credit Card?

Is It Worth Paying An Annual Fee For A Credit Card?

Is It Worth Paying An Annual Fee For A Credit Card ?
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The answer depends on where you go and who you talk to. Many people believe it is an unnecessary expense that doesn’t make sense. After all, there are plenty of cards that don’t charge annual fees. 

Still, just because annual fee credit cards have a bad rap doesn’t mean they deserve it. Credit cards are financial tools, and like any tool, their features have intended uses by design. Whether or not annual fees make sense ultimately depends on how and where you use your card.

Determining if credit cards with annual fees make sense for you depends on a few factors, including the interest rate and rewards offered. Another key factor is which of the following credit card user categories you fall under. Here’s a quick overview of five types of credit card users: 

  • Max or Full Players. These are the most reliable credit card users. They pay their credit completely and on time every month and never pay interest.
  • Revolvers. These are people who make the minimum payments and, in turn, pay the most interest. These are the people credit card companies profit most from thanks to interest charges. 
  • Non-Payers. Non-payers are fairly self-explanatory. They accumulate as many credit cards as possible and accrue the maximum level of debt, then try to ghost the company. Non-payers are not good for credit card companies or themselves.
  • Traders. These folks play the game to their advantage. Also known as super users, these credit card savvy users are always looking for cards with the best rewards, the most cash back, and the longest payback terms. It is good to be a trader, but it is also a lot of work and requires caution.
  • Non-users. These are people who have credit cards but don’t use them. Non-users are often former revolvers who paid their balance off and are now hesitant to use the card. 

Now that you have an idea of the type of user you are or intend to be, we’ll break down who annual fees make sense for, and who should avoid them completely. But first, let’s take a closer look at the annual fee itself.

What is a Credit Card Annual Fee?

This may seem self-explanatory but it’s worth defining in a little more detail to understand its true value. Credit card companies introduced annual fees as a way to account for the other side of the scale. In other words, they take a little because they actually give a lot.

How Does a Credit Card Annual Fee Work?

Credit cards don’t just come with a balance and a statement anymore. They are increasingly being marketed with and for their cash back rewards, travel miles, and customer loyalty reward points. This is important to know for potential credit card users who are considering signing up. While you don’t need to view an annual fee as a red flag necessarily, you should know what is being offered instead.

Is An Annual Fee Worth Paying?

Let’s take this concept out of the abstract and put it into actual numbers you can use to gauge what is going on.

The Scotiabank Momentum Visa Infinite Card charges an annual rate of $120, but the first year is waived. They do offer a $350 welcome bonus, but that is a one-time fee. Next, there is cash back to consider.

They have a special offer (at the time of this writing) giving the user 10% cash back on all purchases (up to a maximum of $2,000) for the first 6 months. After that, though, the cash back doesn’t end.

Users will receive 4% on groceries and recurring payments with merchants like Netflix and Chefsplate. Gas and transit costs with Uber earn 2% cash back, while everything else earns 1%. Clearly, the rewards and cash back add up.  

Let’s say a couple living in downtown Vancouver uses Uber for daily work commutes at $8 per trip. At 2 trips per day per person, that would add up to around $640 per month, earning them $128 per month cash back just for using their card to commute. As you can see, these rewards add up quickly. At a $5,000 minimum, this card won’t be available to everyone, but it can be worked up to.

At this level, where the user is likely a max player or trader, the annual fee is definitely worth it. There is a chance a non-user could find themselves upgraded to a card like this, but for them, it wouldn’t be worth paying $120 a year unless they use the card. 

What about people trying to rebuild their credit? Life doesn’t always go according to plan and this situation begs the question:

Is An Annual Fee Worth It When You Need To Build Credit?

Let’s look at a more accessible card that charges an annual fee. Capital One offers its Low Rate Gold Mastercard, which charges an annual fee of $79 but an interest rate of just 14.9%. They also have a secured product as a safety net for those who still don’t qualify. However, this card doesn’t offer many rewards. Perks include travel and rental vehicle insurance. 

So, is it worth it? At a glance, the lack of cash back, rewards, and incentives might seem like a laughable offer. But remember the target group here. If you’re stuck with a low credit score, unable to enjoy many of the conveniences of using a credit card, $79 is a great deal. You probably won’t even flinch at the $75 security deposit because the value here is access to a card. It is a starting point and an annual fee plus a deposit is a small price to pay for the chance to rebuild your credit.

But here’s the kicker: where the high rewards card above has an interest rate of 20.99%, the Capital One card offers an incredibly low 14.9%. For those who can train themselves to use their cards like a max player or trader, this will pay dividends for your quality of life and future.

Do Annual Fees Make Sense When You Want Better Cash Back Rewards?

Again, the tool is only as good as the person using it. The better the rewards, the better the value when it comes to annual fees. If you make a point of using those rewards, the fees should be totally offset by the cash back. 

When You Make Use Of The Benefits

Benefits like travel miles can make the annual fees worth it. In fact, if you’re mainly seeking travel benefits, there’s a good chance that an annual fee will be a fact of life. 

Some travel rewards credit cards come with hundreds of dollars of fees. But what’s a couple hundred dollars when you’re talking about world travel? It’s all about give-and-take with fees and rewards, so make sure you take advantage of those benefits, or else you’re paying for nothing.

When You Offset The Fee With Spending Rewards

Rewards only work if you use them! Many cards focus on particular lifestyles. Lots of cards position themselves as convenient for travellers. Benefits like supplemental car insurance and bonus points that cover travel expenses are ideal for jet-setters. But if you’ve never left your town, you’ll want different rewards. In this case, a card like the Momentum Visa is a better option. 

In Conclusion

Annual fees don’t make sense for everybody. Many people don’t want to bother to use the rewards and don’t need to pay a fee to get a card. For them, it does not make sense to pay more.  

For those wanting to rebuild their credit, or planning on using the card in very specific ways, these fees are a small price for access to benefits that pay for themselves. 

It all comes down to how you’ll use the card. We’re all different and our credit card use will reflect this. Do your research to ensure you’re choosing a card that truly suits your needs.

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