Credit Card Annual Fees: What Are They and Are They Worth It?

Tyler Parker, Preferred Banking Office Manager, First Republic Bank
October 31, 2022

  • Some credit cards charge annual fees in exchange for perks
  • Those perks may include cash back on purchases, hotel points, airline miles and more.
  • But the fees can add up, so you'll want to determine whether they're worth it for you.

If you've recently received a credit card offer, or are interested in earning new or different rewards, you may find yourself comparing various credit cards. And one of the first things you should check is whether the credit card has an annual fee.

Dive into this article to learn more about what credit card annual fees are, why card issuers use them, how these fees work and what to consider before applying for these types of credit cards.

What is an annual fee for a credit card?

A credit card annual fee is the amount the credit card company charges you to use its credit card. This fee differs from credit card APRs and other credit card expenses, such as late fees you can incur from not making a payment on time.

What types of credit cards have annual fees?

Not all credit cards have annual fees. However, the following types of credit cards are more likely to charge annual fees:

  • Rewards credit cards: Rewards cards provide perks, such as cash back, airline miles or reward points, for using the credit card.
  • Secured credit cards: These cards require you to provide a security deposit to the card issuer before you can use the card.
  • Travel credit cards: Like rewards cards, travel credit cards offer travel-related perks, such as airline miles or hotel points, for purchases made on the card.
  • Premium credit cards: Usually viewed as a status symbol, these high-end cards are offered only to select spenders with excellent credit.

Why do credit cards have annual fees?

Credit cards may charge an annual fee for many reasons. For instance, a rewards or premium credit card may charge an annual fee for the perks of using the card. Other cards with annual fees may offer exclusive access to clubs or hotels, discounts on travel, cash back after reaching certain spending limits or even warranties on purchases.

Rewards programs

Rewards and cash back cards often charge an annual fee to help support the credit card rewards program, which may include everything from reward points on eligible purchases to a statement credit that you can use to lower your monthly bill, to cash back that you can spend or save. Other perks can include free checked bags when flying, upgrades to hotel rooms and first-class airline seats or discounts from the credit card's brand partners.

Building credit

Some secured cards, for example, charge an annual fee, in addition to a refundable deposit, as a safeguard for providing credit to borrowers with lower credit scores. Borrowers can leverage the credit line to make purchases and pay the bill off monthly to improve their credit history and boost their credit score.

Is a credit card with an annual fee worth paying for?

An annual fee credit card may not work for everyone; some cards may only be available to consumers with good credit. In addition, the annual fee combined with the credit card's interest rate may make some cards cost-prohibitive to some consumers.

Before applying for any type of credit card, consider factors such as your spending habits, your credit standing and your monthly budget. Ask yourself:

  • Will you use the card often enough to offset the annual fee every year?
  • Will you be able to pay off your entire balance every month? If not, any interest charges, in combination with the cost of the annual fee, may outweigh the monetary benefit of the card's perks.

How are annual fees paid?

How the fees are distributed depends on the credit card issuers. You typically pay the first annual fee during your account opening and then every year after that. However, some card issuers may divide the fee equally across 12 months, and others may issue the fee in the month of their choosing, not necessarily the month when you opened your account.

How to avoid annual credit card fees

Plenty of credit cards don't charge annual fees. So if the perks of a fee-based card don't outweigh the costs for you, consider traditional fee-free credit cards. You can contact the credit card issuer to explore your options if you already have credit cards that charge an annual fee.

Some card issuers may allow you to downgrade your card — or upgrade it if you have a secured card to build your credit — to one without a fee. This option enables you to eliminate a cost without closing your credit card and therefore keeping your credit history active for that card. The latter may affect your credit score by reducing your amount of available credit (which may increase your credit utilization ratio).

The bottom line

Credit cards with annual fees offer some perks that can make them worth it for some users — as long as the benefits are things you want (airline miles, hotel points, cash back, etc.). Research your options; be honest about your spending habits and consider your credit history when evaluating whether another credit card makes sense for your financial life. An experienced personal banker can chat through your options, so you're able to cover your monthly expenses while meeting your long-term financial goals.

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