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Credit card annual fees: What they are and when they're worth it

Cards with annual fees unlock better rewards -- just make sure the rewards offset the cost of the card.

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Not all credit cards feature an annual fee -- a once-per-year charge for the privilege of being a cardholder -- but a handful of them do, and sometimes those are the ones with the the best rewards and the best introductory offers. But it doesn't always make sense to sign up for a card with an annual fee, and it can be tricky to figure out the financial rationale for whether it's worth it or not. The bottom line: You don't want a credit card with an annual fee -- unless the perks truly outweigh the costs. 

What is an annual fee?

It's a fee you pay once a year. A credit card annual fee is typically a set amount you pay on the anniversary of when you first opened your account. If you opened your card in May, for instance, you'd owe the annual fee every subsequent May for as long as the account stays open. This fee is generally automatically added to your card balance and will show up on your billing statement. 

When is it worth the cost?

An annual fee card may be the right option for you when you can make the most of a card's perks. This involves knowing what those perks are and their dollar value. It also entails knowing how you'll use the card. This can be gleaned by looking at your past behavior and also by gauging anticipated use in the coming months. If the benefits aren't worth more than the cost, then you might be better off with a no-annual fee card with a slightly lower rewards rate.

Which types of cards have annual fees?

Generally, credit cards that charge an annual fee fall into a few main categories:  

  • Premium cards with luxury perks -- such as access to VIP airport lounges, robust signup bonuses, free hotel upgrades, and benefits and perks on flights -- typically charge annual fees. 
  • Secured cards -- credit-building cards backed by a security deposit -- may charge a low annual fee. 
  • Rewards cards with top cash back and rewards rates (say, 3 points for every dollar in certain categories, instead of 1 point for every dollar) typically charge annual fees. 
  • Travel cards with annual fees often have higher rewards values and may offer a suite of expanded travel perks: trip cancellation, lost luggage insurance and more.
  • Cards with high welcome bonuses -- think 100,000 points if you spend X amount in the first three months -- usually have an annual fee. 

When a card with an annual fee makes sense

In some cases, a card with an annual fee might offer you a higher tier of rewards that makes better financial sense for your lifestyle. The key is to choose a card with perks that best suit you and is a match for your spending habits, and not to go strictly by what your friends or relatives may use. 

Here are a few instances when paying an annual fee might be worthwhile.

To save for a big-ticket item 

Since annual fee cards tend to offer better rewards or cash-back values, you might use one to save up for a big-ticket item like a vacation, a new laptop or new furnishings for your home. You'll want to use your card strategically and responsibly to earn as many points as you can without blowing your budget.

To unlock greater rewards

Premium credit card rewards might require choosing one with an annual fee. Finding the right card to fit your lifestyle -- i.e. a travel card if you're a frequent flyer or a dining card if you eat at restaurants often -- can help you maximize your rewards.

To enjoy more perks

Besides rewards, paying for a card with an annual fee could net you greater perks, perhaps making it worth the cost. 

The types of perks could vary widely, and there's a glut of cards to suit different lifestyles, interests and preferences. For instance: You might enjoy free cellphone protection through a business card, trip cancellation and lost baggage protection from a travel card, or generous cash back when pumping fuel on a gas card. There are enhanced perks for just about any type of credit card, but those with annual fees tend to boast better perks. 

To travel for less 

If you travel frequently, it could be worth it to get a travel credit card that comes with perks that either help you save while traveling or help make for more enjoyable journeying. 

You'd want to sit down and do simple math to figure out roughly how much you'd save on travel-related expenses, such as perks at the hotel, collision insurance on your rental car and food and libations at the airport. 

To take advantage of a generous welcome offer 

A generous signup offer can help you earn points quickly -- and might even wipe out the annual fee. To reap the offer, you typically need to spend a certain amount within the first few months. It's also important to figure out if the amount you're required to spend is reasonable for you. For instance, if you need to spend $5,000 during the first three months but would more realistically spend $2,000, it might not be worth your while. 

While a high welcome bonus might entice you, it's important to look at all the features and benefits of a particular credit card. That way, you won't open a card to scoop up the signup bonus, only to find the card to be of diminishing value and use down the line. 

To build credit 

You might want to open a secured card with an annual fee versus one without a fee. Why's that? For one, there could be fewer criteria to be eligible for a card, such as not requiring a bank account to open the card. Or it might have some features and perks that those without annual fees don't have: educational resources, free credit monitoring and identity theft protection, to name a few. Just make sure you can comfortably afford the annual fee and always compare no-fee options before deciding on a card.

When to steer clear of annual fee cards

It might be better to skip an annual fee card if you simply won't be taking advantage of its benefits. Just as you might get dazzled by a smart home device with innovative features and all the bells and whistles, only to find it unused in a corner six months down the line, a card with perks gone untapped could turn out to be a waste of money. 

You might also want to steer clear of annual fee cards if you anticipate reaping the perks the first year, but not in the following years. You'll also want to not open such a credit card if you think the large welcome bonuses or the ability to reap massive rewards points could lead to overspending. The goal is to use these perks to your advantage to help you financially, not have you entrenched in a debt hole. 

And if there are other cards that are a more basic version or if you simply can't afford the fee, no matter how great the perks are, the damage to your wallet won't justify the cost.