You might think it’s crazy to pay an annual fee for a credit card. Why pay when there are so many other card offers without fees?
Although there are many great no annual fee credit cards, a yearly fee shouldn’t scare you away from any particular card. There are many situations in which a card with an annual fee will end up being more valuable to you than a no-fee card.
Why An Annual Fee Card Might Be Worth The Cost
Here are some of the most common reasons why you might want a card with an annual fee:
- Bad or Limited Credit History: You don’t have the best credit history, so you may need to settle for a card with a fee that’s designed for poor or limited credit
- Offset the Fee with Spending Rewards: You’ll spend enough to offset the annual fee, earning more rewards than you could with a no-fee card
- A Large Intro Bonus: It has a large introductory bonus for spending a certain amount in the first few months of account opening
- Valuable Travel Perks: There are travel benefits that you want, like free hotel stays, airport lounge access, or membership in hotel and airline loyalty programs
- Special Card Features: It has a particular feature that you need, like the ability to transfer points
- A Downgrade Path (Product Change): Some cards allow you to downgrade to a lesser version, with the same account history and credit line but fewer rewards and benefits
We’ll go over each of these reasons a bit, with examples showing how cards with annual fees can be worth the cost.
Credit cards with annual fees are good for two basic types of people, with different credit histories and credit scores:
- People with bad or limited credit who need a card with an annual fee because they can’t be approved for anything else
- People with good or excellent credit who are looking for rewards and benefits that are better than average
Annual fees range from the fairly small, like $49, to the very large, like $550 or more. But many of them are about $100. Premium travel cards tend to have the highest fees. Some cards will waive the annual fee for the first year, giving you some time to see if you’ll use the card enough for it to be worth it.
Bad or Limited Credit History
If you have bad, limited, or no credit, your card options will be limited. Some credit card companies issue cards with annual fees as a method to help you build or rebuild your credit.
These cards don’t come with great rewards or benefits, but they give you a chance to establish a positive payment record on your credit reports. Don’t expect to be showered with points or get valuable travel perks, because they aren’t the most exciting cards. They’re meant to help you get your credit on track.
Secured credit cards are a type of card designed for building credit. They require a security deposit when you’re approved, which will fund your credit limit for the card. Some secured cards have an annual fee in addition to this deposit, although there are also several that don’t charge a fee.
The Wells Fargo Secured Visa Card has a $25 annual fee, for example, which is quite small. But why would you pay this fee, when there are other options? You might want to because this credit card offers a very high possible credit limit compared to other secured cards, up to $10,000. But you’ll need to make a security deposit of that amount to get a credit line that high. And you’ll need a Wells Fargo checking or savings account to use this particular card.
There are regular, unsecured credit cards with annual fees that are meant for people without the best credit. A good example is the Capital One® QuicksilverOne® Cash Rewards Credit Card (Review), which has a $39 annual fee. It’s a pretty simple rewards card, but Capital One, the issuer, designed it for people with about average credit (you may be approved even with poor credit scores, depending on other factors).
And, of course, you can also find unsecured cards with no annual fees for average credit. But you might have a more difficult time being approved for these, compared to cards with fees.
Offset the Annual Fee with Spending Rewards
Cards with annual fees offer better spending rewards than no-fee cards — i.e., more cash back or points per dollar. But that doesn’t mean they’ll always be more rewarding overall.
When tallying up your total rewards for a given year, you need to subtract what you spent on the annual fee, if your card has one. This could put a big dent in your profits, depending on how much you spent on purchases.
There’s an easy way to compare the value you’ll get from different cards at different spending levels. Consider these two hypothetical credit cards:
- Card A has an annual fee of $100 and provides 2% cash back for all purchases
- Card B has no annual fee and provides 1.5% cash back for all purchases
Card A has an annual fee but provides more cash back, while Card B has no fee and provides less cash back. Which card would be right for you, providing more overall cash back? The answer will depend on how much you spend each year.
To offset the $100 fee of Card A, you would need to spend $5,000, earning at the 2% rate. That would completely offset the annual fee, leaving you at zero profit. That’s because $100 is 2% of $5,000.
If you spent that same $5,000 with Card B, you’d only get $75 in cash back, earning at the 1.5% rate. But that would be all profit, because there’s no annual fee to pay.
This shows how you’ll actually earn more profit overall with Card B if you just spend $5,000 per year, even though that credit card offers a lower cash back rate. You’ll always need to factor in annual fees like this when considering the value of a card.
For Card A to be more rewarding you’d need to spend more than $20,000 per year, after subtracting the annual fee. This is the point at which Card A becomes more valuable to the cardholder. If you spend less than that per year, Card B is the more profitable choice.
|Amount Spent Annually||Cash Back Earned (Card A)||Cash Back Earned (Card B)|
You can do calculations like this to compare any cards, to see how much value you’ll get at different spending levels.
Remember that this process doesn’t take into account any of the other benefits that come with credit cards, like travel perks and shopping discounts. There are also introductory bonus offers available, which can provide tons of points or cash back. These are important, and shouldn’t be ignored when considering how to offset the annual fee of a card.
Large Introductory Bonus
Many reward cards offer an introductory bonus, also called a signup bonus or new cardmember offer. This is usually a certain amount of cash back (or number of points), which you’ll get for spending a certain amount in the first few months.
Cards with annual fees tend to come with bigger introductory bonuses. You pay more for the card, you get a better bonus, plain and simple.
Take the Blue Cash Everyday® Card from American Express (Review), for example. It has no annual fee and provides a $150 cash bonus for spending $1,000 on purchases in the first 3 months after account opening. This is a 15% cash back equivalent, which is not too bad.
Compare that to the upgraded version of the card, the Blue Cash Preferred® Card from American Express® (Review). It has a $95 annual fee and offers a $200 cash bonus for spending $1,000 in the first 3 months. This is a 20% cash back equivalent, which is obviously better than what you get with the Everyday card.
You wouldn’t want to pick the Preferred version purely based on the introductory bonus, because it has that $95 annual fee to pay. Make sure you’ll also use the card enough to offset that fee every year with the cash back you earn from spending.
Valuable Travel Perks
Travelers love credit cards for the airline miles, hotel points, and many perks that are added on. Cards with high annual fees have more of these extra benefits, but these perks can go a long way towards offsetting those fees.
In general, travel cards with high annual fees are better for people who travel frequently and spend quite a bit of money throughout the year on trips.
They come with benefits which include discounts on travel bookings, airline and hotel travel credits, access to airport lounges, free checked bags, hotel member statuses, and many more. There are general travel cards, which are good for spending with any airline or hotel. And there are also cards that are co-branded with specific airlines and hotels, which provide brand-specific rewards and benefits.
Let’s look at one general travel card that’s renowned for its perks, the Platinum Card® from American Express (Review). At $550 per year, many people would immediately decide that this card is out of bounds. But if you can make good use of its benefits you can get far more than $550 in value per year.
Check out some of this card’s features, and how much value you can get from them:
- Annual Airline Credit: $200 per year
- Fee Credit for Global Entry ($100) or TSA Pre✓ ($85): Once every four years, so maximum of $25 per year
- Annual Uber Credits: $200 per year
- Fine Hotels & Resorts Collection: $75 hotel credit per visit, plus complimentary breakfast for two, WiFi, and more
- Complimentary Boingo WiFi Access: $468 per year
- Complimentary Airport Lounge Access: Intangible value
- Starwood Preferred Guest Gold Member Status: Intangible value
- Hilton Honors Gold Member Status: Intangible value
- Lowest Hotel Rates Guarantee: Intangible value
These benefits can be valued very high, and this doesn’t even include everything you get with the Platinum card.
As you can see, you’ll get $420 in value per year from the first three credits mentioned. The $75 hotel credit can be used for every eligible two-night stay, so with several bookings per year you could easily get hundreds of dollars in value from that perk alone. You have Boingo WiFi access, which is normally quite expensive but it may not be very useful to some people, so you might not value it very highly.
Then there are the intangible benefits, like airport lounge access and Gold member status at SPG and Hilton. We’ll just go over the lounge access here, but you can read more about those hotel member status perks in our review.
The Amex Platinum is the best credit card if you want to relax at the airport because it provides complimentary access to a very wide selection of lounges, more than any other card: Centurion Lounges, Delta Sky Club, Escape Lounges, Airspace Lounges, and Priority Pass Select. It’s difficult to calculate how much value you can get with this benefit, because it will depend in part on how many times you visit the lounges, and which lounges you visit. Some lounges offer a buffet of free food and drinks for example, basically providing a free meal with every visit, while others are more basic.
Centurion Lounge access is only available to Platinum and Centurion Black Card (Review) users, so you can’t put a price on this membership. A one-year membership to Delta Sky Club is $495. A single visit to an Escape Lounge costs $40 per adult. Airspace Lounges cost a minimum of $20 per visit. And a one-year Priority Pass Select membership costs $99, with each lounge visit costing an additional $27.
So airport lounges are definitely costly, but you get access to all of them with your Platinum card. You won’t need to pay the daily visit fees for lounges that require one, but your guests will need to pay.
How much would you value this airport lounge access? It depends on how much you’ll use it, but high-end lounge visits aren’t cheap by any means.
If you spend a lot of time in airports every year, this perk alone could make the $550 annual fee worth the cost. Then add in the airline credits, Uber credits, hotel credits, and other intangible benefits, which are worth many hundreds of dollars. We haven’t even mentioned all the points you’ll earn from spending with the card!
It’s easy to see how the benefits you get from the Platinum card can outweigh the fee. But this is only true if you’ll travel enough throughout the year, using up the credits, hanging out in airport lounges, and enjoying your member status at hotels. Otherwise, if you’re not a frequent traveler, a card like this will only cost you money.
Special Card Features
Not all credit cards are created equal. Some cards have features that others don’t, and sometimes you might need to pay an annual fee if you want a card that can do something in particular.
Chip-and-PIN EMV Capability
When traveling outside the U.S. it can be helpful to have a credit card with Chip-and-PIN EMV technology. This will allow you to use certain unattended terminals and kiosks, which may require a PIN to verify the transaction.
Most cards issued in the U.S. come with basic Chip-and-Signature capability, but there are some with the PIN function as well.
- Barclays credit cards: all cards issued with both Chip-and-Signature and PIN capability
- Capital One credit cards: all cards issued as Chip-and-Signature, some cards are issued with PIN capability
- Bank of America credit cards: all cards issued with Chip-and-Signature, and you can request a PIN for your card
Some of these cards have annual fees, while others don’t. Some of them might have foreign transaction fees, which won’t be good for traveling outside the country.
Here’s an example from each issuer:
|Barclaycard Arrival Plus® World Elite Mastercard® (Review)||$89||
|Capital One® Venture Rewards® Card (Review)||$95, $0 the first year||
|Bank of America® Travel Rewards (Review)||$0||
There are also some no-fee card offers from credit unions that include Chip-and-PIN capability, like the PenFed Platinum Rewards Visa Signature Card.
You can contact your card issuer to learn about the PIN functionality of your card, and what to do when making purchases outside the U.S.
Another useful feature is the ability to transfer points to hotel and airline loyalty programs. Chase, American Express, Citi, and Barclays allow this on some of their cards. Cards that are co-branded with airlines and hotels usually offer point transfers to a selection of partners.
Point transfers can give you a better value for your points, compared to redeeming them with some normal method like paying for travel expenses or statement credits. The value you get with a transfer will depend on where you transfer the points and how you use them, so there’s no guarantee that you’ll always get a great deal. You may have to do some searching to find an offer that’s better than a normal redemption method.
For example, the Chase Sapphire Preferred Card (Review) offers 2X Ultimate Rewards points on travel and dining purchases. Those points are normally worth 1.25 cents each, when redeemed for travel expenses through Chase Ultimate Rewards. That gives you a cash back equivalent of 2.5%.
Or, you could transfer those points to an airline or hotel loyalty program, where you might get more cents per point. We’ve found transfers that provide a value of 1.6 cents per point, for an economy-class Southwest Airlines award flight. No doubt there are better deals available, too. In that case you get a cash back equivalent of 3.3%.
Chase issues several cards that earn rewards in the form of Ultimate Rewards points, some with fees and some without. But only the cards with annual fees have the ability to transfer points.
If you have multiple Chase cards, you can transfer rewards from a no-fee card to a different card that does allow point transfers. The Chase Freedom (Review) has no fee and earns 5X points in rotating categories, for example. Normally your points would be worth only 1 cent each with that card. But if you transfer those points to the Chase Sapphire Preferred, and then transfer them yet again to a loyalty program, you can get as much as 1.6 cents each or more. This is a great strategy for combining multiple Chase cards, but you’ll need at least one with an annual fee to do it.
You don’t always need to pay a credit card annual fee for the privilege of point transfers. American Express and Citi both have some no-fee cards that allow point transfers, like the Amex EveryDay Card (Review) and the Citi ThankYou® Preferred Card (Review).
You’ll find different loyalty partners among these issuers, and different transfer rates as well. Chase is favored by many for offering a consistent 1:1 transfer rate, but you may find better deals with the other issuers. Sometimes Amex will offer bonus points for certain transfers, and other credit card companies might too.
A Downgrade Path (Product Change)
Having a card with an annual fee isn’t a life sentence. There are many reasons why you might want to close a card with an annual fee. Here are some of the most common:
- Personal finances: Maybe you have less spending money than before, and you won’t be spending enough to warrant a card with a fee
- Personal lifestyle: You could start traveling with a different airline or shopping at different stores, and a different card would provide more value
- Change in card terms and fees: Sometimes a card’s annual fee, foreign transaction fee, or other terms are changed by the issuer, and you no longer want to use it
- Change in card rewards or benefits: Credit card issuers occasionally change the way rewards are earned or redeemed, and the card may not be as profitable as before
- A better card offer is available: New cards come out all the time, and maybe there’s a much better card out there for you
Instead of closing a card with an annual fee and applying for a new one, you may have another option. A downgrade, or product change, is a better option than closing your card because you’ll be able to keep your account history and credit limit.
If you downgrade to a no-fee card you’ll keep the same account with that issuer, and usually the same card number too. The new card will have weaker rewards and fewer benefits, but you’ll no longer have to pay to keep it open.
This is better for your credit scores than closing one card and opening a new one, for several reasons:
- No hard inquiry: You won’t get a hard inquiry on your credit reports, which would have had a slightly negative effect
- No new account: You won’t have to open a new account, which would reduce the average age of your accounts, lowering your credit scores
- Same account on credit reports: The original account will continue to age, increasing the average age of your accounts
- Same credit limit: You’ll keep the same credit limit rather than getting a new, probably smaller limit, which will be better for your credit utilization
You’ll usually be able to keep any rewards you earned when you downgrade, rather than losing them like you would if a card is closed. Check with your issuer beforehand to make sure. Take note that if you downgrade you may lose certain redemption options, like point transfers with Chase cards as explained above.
There’s one major downside to downgrading to a particular card instead of opening that card new: you won’t get any new cardmember offers, like introductory bonus points or cash back, or an intro APR. This could be a good reason not to downgrade, depending on your particular situation and card options.
Typically, you need to wait one year after getting the card before you’ll be eligible for a downgrade.
To see if you can downgrade one of your credit cards, simply call customer support and ask. You can do this by calling the number on the back of your card, or by checking our list of credit card company phone numbers for your issuer.
Not all cards with annual fees have a downgrade path. Cards that are co-branded with airlines and hotels usually can’t be downgraded to non-branded cards. Business cards can’t be downgraded to regular consumer cards. And charge cards from American Express can’t be downgraded to regular credit cards.
Here are some good no annual fee cards you can downgrade to, for several different card issuers.
|Chase Downgrade Options|
|Chase Freedom (Review)||
|Chase Freedom Unlimited (Review)||
|Chase Ink Business Cash (Review)||
|American Express Downgrade Options|
|Blue Cash Everyday Credit Card (Review)||
|Amex EveryDay Credit Card (Review)||
|Blue for Business Plus Credit Card (Review)||
|Citi Downgrade Options|
|Citi Double Cash Card (Review)||
|Citi ThankYou® Preferred Card (Review)||
|Capital One Downgrade Options|
|Capital One® Savor® Cash Rewards Card (Review)||
|Capital One® Quicksilver® Cash Rewards Card (Review)||
|Capital One® VentureOne® Rewards Card (Review)||
Could You Do Better with a No Annual Fee Card?
Many people could probably use a few credit cards at any one time, with most of those being no-fee cards. But having a card or two with an annual fee can give you access to better rewards and perks than you could otherwise get.
I myself have a handful of cash back credit cards without annual fees, and just one with a fee, the Amex Blue Cash Preferred (Review). It gives me 6% cash back on groceries, better than any no-fee rewards credit card can provide.
The right card (or cards) for you will always depend on your personal lifestyle and spending habits. In general, if you’re not going to use it very much, you should go for a card without an annual fee. It won’t cost you any money, and you won’t have to worry about getting enough value from it to warrant the cost.
If you’ll spend quite a bit of money with your credit card, however, or want premium travel perks and other benefits, you’ll typically get more out of cards with annual fees. And if your credit isn’t very good, you may have to go with an annual fee card (although this isn’t always true — there are credit cards for bad credit without annual fees).
You shouldn’t avoid cards because of their annual fees, but you shouldn’t just go with what looks like the best possible (most expensive) card either. The best card for you will give you exactly what you need for a reasonable price, whether that’s a way to build credit, a solid rewards program, or luxurious perks if you’re a frequent traveler.
A credit card with an annual fee may seem a bit intimidating at first, especially if it’s several hundred dollars. But in many cases these cards actually don’t have to cost anything at all, if you can make good use of their rewards and benefits.
Before applying for a card with a fee, check out our picks for the Best No Annual Fee Credit Cards. You might be surprised at the level of rewards and benefits you can get. Once you know what these base level, no-fee cards are like, you can start moving your way up the price range.
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