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Is Paying an Annual Fee for a Credit Card Worth It?

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.

What Is a Credit Card Annual Fee?

Annual fees are pretty self-explanatory. A credit card annual fee is a price that you’re required to pay every year to remain a cardholder and enjoy the card’s rewards and benefits.

These fees tend to range significantly in price, but higher annual fees on reward and travel cards often accompany more valuable benefits. In other cases, they may be the cost of having poor credit.

Annual fees are just one of many fees that you may be charged, but in many cases you can use credit cards completely for free if you follow certain guidelines.

When are annual fees charged?

During your first year as a cardholder, most credit card annual fees are charged on the last day of the month that you’re approved. Sometimes it will be charged as soon as your account is opened. In the following years, it’ll be charged around the same time. Less commonly, a card’s annual fee might be charged in monthly installments.

It’s worth noting that if you cancel or downgrade a card within a certain time period after paying the annual fee, you might get a refund, though it may be prorated.

Annual fee policies vary, so if you’re uncertain how yours works, simply contact your issuer and they should be able to tell you.

Is It Worth Paying an Annual Fee for a Credit Card?

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 credit 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.

Here are some of the most common reasons why you might want a card with an annual fee:

  • Bad or limited credit history: If you don’t have the best credit history 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: If you’ll spend enough to offset the annual fee, you may earn more rewards than you could with a no-fee card.
  • A large introductory bonus: If the card has a big signup bonus for spending a certain amount in the first few months of account opening.
  • Valuable travel perks: If 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: If 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.

Let’s go over these examples, showing you how cards with annual fees can be worth the cost.

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 good 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.

There are regular, unsecured credit cards with annual fees that are meant for people without the best credit. 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 cash back 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 2% of $5,000 is $100.

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 rewards 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 than Card B 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.

Here’s quick visual as to how these two compare:

Amount Spent AnnuallyCash 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 introductory bonuses, also called signup bonuses or new cardmember offers. 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. Just make sure you’ll also use the card enough to offset that fee every year with the cash back you earn from spending.

Introductory bonus offers change over time, and in some cases, you may see a special offer that other people aren’t currently getting. Some people try to use this to their advantage, waiting to apply for cards when the intro bonus is larger than usual. But there’s no guarantee that a larger bonus is coming soon, and sometimes people end up wasting their time waiting.

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.

The benefits you get from travel cards can outweigh the fees. 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 (like Chip-and-PIN EMV technology or point transfers) 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 (like Barclays, Capital One and Bank of America cards).

Some of these cards have annual fees, while others don’t. There are other card fees to consider too, like foreign transaction fees, which won’t be good for traveling outside the country. 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.

Point transfers

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.

You don’t always need to pay a credit card annual fee for the privilege of point transfers. You’ll find different loyalty partners among these issuers, and different transfer rates as well.

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. You might even get a refund (though it may be prorated) if you downgrade within a given period of time after paying your current card’s annual fee.

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.

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.

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 former charge cards from American Express can’t be downgraded to regular credit cards.

Should I Get a Credit Card With No Annual Fee?

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.

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 if you avoid interest and other fees, 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.

The Short Version

  • Cards with higher annual fees may boast better benefits, while some very basic cards will charge annual fees to mitigate the risk of lending money to individuals with bad credit
  • In general, if you’re not going to use the card very much, you should go for one without an annual fee
  • In many cases, cards with annual fees don’t have to cost anything at all if you can make good use of their rewards and benefits
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