There are plenty of excellent credit cards that have no annual fees, so why would you ever choose a card that has one? For the most part, the reason is simple math. Do the rewards you get outweigh the cost of the annual fee, and could you get those same rewards with a different card that charges no annual fee?
Is a card with an annual fee right for you? Start by reviewing your spending habits. The more dollars you spend via credit, the more likely you are to be able to redeem the rewards associated with an annual fee card. Don't assume that you will end up spending more on credit just to hit redemption points, because that is an excellent way to rack up unnecessary debt.
Follow that by checking all the type of rewards that the card allows and matching it with your needs. Cash-back is easy to compare by calculating your cash back on an average year's worth of purchases and comparing it to the annual fee, but what about travel rewards? Would you take advantage of harder-to-quantify perks like travel or rental car insurance?
Look carefully at how the rewards are triggered and redeemed. Does it require a certain purchase level to trigger the rewards, and if so, are you likely to spend that amount?
If you typically carry a balance on your card, don't forget to take the interest rate into account. Some cards with annual fees may offer lower interest rates based on creditworthiness. Go over your past twelve months' history on your payments, and see if the interest that you pay wipes out your rewards — or, conversely, if you save enough on finance charges with a lower interest rate that the annual fee is worthwhile.
Many interest rates are variable, based on the prime rate. Right now, the prime rate is low, but it may not always be so. Keep that in mind as you run your calculations and know at what rate your card becomes a burden. Check for the presence of a rate cap.
Take first-year bonuses, fee waivers, and special deals into account, but base your primary calculations on the years after those deals expire. Credit card companies offer those bonuses for a reason.
Finally, check for the presence of other fees such as late and returned payments or transaction fees for cash advances. Are you likely to incur these fees given your usual uses of credit?
As an example, consider the Barclaycard Arrival Plus™ World Elite MasterCard®. It has a multitude of perks targeted at travelers, with 40,000 bonus miles given at least $3,000 in purchases in the first ninety days. That's a tempting offer if you were planning to spend that much anyway. All purchases earn double miles, allowing you to rack up points quickly. When you redeem, you receive 5% of your points back toward your next trip. Miles do not expire as long as your account is in good standing.
How about fees and rates? The annual fee is $89 but is waived for the first year. The interest rate (APR) is variable beginning at either 16.24% or 20.24% depending on creditworthiness — decent rates for a rewards card but not the lowest. Cash advances carry a higher 25.49%. Late/returned payment fees can run up to $37.
Rewards are relatively flexible and easy to redeem, making this a good card for those who do not like to stick with one airline or hotel chain.
If you are a frequent traveler who mixes airlines and hotels, does not carry large balances or carry balances often, and is relatively creditworthy, this card would be an excellent choice for you — especially if you do intend to spend enough to claim your initial bonus miles.
The same logic works with other cards as well. Be sure to narrow your choices of card down to those that match your spending characteristics, and then compare similar cards with and without annual fees to make your decision. Don't immediately assume that an annual fee is a waste — you may get an excellent return for your investment.
If you want more credit, check out MoneyTips' list of credit card offers.
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