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Why Some Credit Cards Have Annual Fees


Under most circumstances, we’ll be among the first to recommend avoiding paying to have a credit card. However, there are sometimes valuable rewards to be derived from cards with price tags attached.

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Here’s why some credit cards have annual fees.

What is an Annual Fee?

As the name implies, these are fees you’ll pay on a yearly basis to hold a particular credit card. The amount of the fees is spelled out in your cardholder agreement, along with the perks you’ll derive from using the card.

It’s important to note most card issuers charge the fee directly against the card. The first year’s fee is usually applied the moment you activate the card. Thus, if you get a card with a $10,000 limit and an annual fee of $100, you’ll only have $9,900 available on the card after you activate it.

You should also bear in mind that $100 becomes part of the balance due on the card and is subject to interest charges. If you want to avoid this, you’ll have pay the $100 before the grace period ends.

What’s In It For Me?

In most cases, cards with annual fees offer some sort of benefit for using the card. The fees go to offset these advantages. This might be a bonus for taking the card, air travel miles, hotel stays or even cash back rewards.

According to The Simple Dollar, other benefits include:

  • Credit card perks: While all cards offer a different set of benefits, many rewards cards that charge an annual fee come with special perks such as price protection, extended warranties, and free FICO scores.
  • Insurance and other protections: Travel credit cards specifically are known for offering pricey insurance coverage as a cardholder perk. This coverage can include primary rental car coverage, trip cancellation/delay coverage, and emergency travel assistance.
  • Membership in a rewards program: If you charge a lot of expenses to your credit card, membership in a rewards program can help offset the cost of your card’s annual fee.

However, cards aimed at people with substandard credit scores often impose annual fees as well. The idea is to offset the risk of extending credit to individuals who have had money problems in the past.

In these cases, particularly if you still have outstanding debt, working with a company like Freedom Debt Relief to develop a plan to settle your debts might be a better move than taking on another credit card—and even more debt.

How Can You Tell if it’s Worth It?

By and large, only heavy credit card users generate enough activity to really benefit from credit card reward programs. However, if you’re in a position to use a card to make all of your monthly purchases and pay them off before the grace period elapses you can do OK.

The only way to know for sure is to look at how much you spend over the course of an average month and weigh it against the parameters the card issuer establishes to achieve the rewards. Again though, you must be certain you can pay the card off in full every month. Otherwise, you’ll wind up making interest payments in addition to the annual fee.

Another thing to be careful about is sign-up bonuses. Simply opening the account is usually not enough to qualify for it. You’ll likely need to meet a spending target within a certain time period to get the bonus. Issues like these are important to consider as you’re comparing various programs.