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When you’re looking at credit cards, you’ll probably notice that some charge an annual fee, while others don’t. Among cards that do charge fees, the average is currently $94 to $157 per year, though you can find cards with lower, as well as much higher, annual fees.While your first instinct might be to avoid any card that comes with a yearly fee, there are times when the benefits you get in return (such as cash back, rewards points, or an opportunity to build your credit) can make it well worth the annual cost. However, paying a fee may not be worth it for everyone.Read on to learn why some cards charge annual fees, what you get in exchange for those fees, and when it makes sense to get a card with a fee (and when it doesn’t).
What Is a Credit Card Annual Fee?
A credit card annual fee is the cost your card issuer automatically charges to your account each year to allow you to keep the account open. They are a common type of credit card fee.Annual fees can range from $50 to $700. Credit card issuers must legally disclose all annual fees when you apply for a card, so the annual fee should not come as a surprise. Not all credit cards have fees, however. And, those that do tend to offer benefits in return, such as rewards points, airline miles, and cash back opportunities. The higher the annual fee, typically the more benefits the card provides.
Why Credit Cards Have Annual Fees
Annual fees are one way that credit card companies make a profit. They also make money by charging interest on any balance you carry from one month to the next, as well as from credit card processing fees that merchants pay every time you use your card.The annual fee also offsets the cost of offering rewards and perks to customers. Some of the best credit cards may charge annual fees because they offer some of the following benefits:
No foreign transaction fees: If you use a credit card to travel overseas or to shop from international merchants, you typically have to pay a foreign transaction fee, which can run around 1% to 3% of the purchase amount. Cards with annual fees often waive this charge.
Travel credit: Some cards with annual fees offer a yearly statement credit that reimburses cardmembers for a portion of the travel purchases they made with the card.
Other travel perks: Cards with annual fees will often offer other travel savings, like free checked bags, car rental insurance, or a complimentary hotel stay after your cardmember anniversary.
Cash back: A card with a fee may offer a small percentage of what you spend in certain categories, such as groceries and gas, back as a reward.
Do All Credit Cards Have Annual Fees?
No, there are many no-annual-fee credit cards on the market. These cards typically come with fewer perks like cash back and travel benefits. However, they can be a good deal if you’re not likely to benefit much from the rewards and extras offered by a premium or rewards card.
How Credit Card Annual Fees Work
Card issuers charge annual fees to offset perks or benefits that the card offers to customers. These benefits may have a direct monetary value (like a travel credit) or may offer a non-monetary value but still provide benefits (like access to airport lounges and priority boarding on flights). The annual fee will usually show up as a lump sum charge on your credit card statement, starting on your first statement and every 12 months after that.If your credit card issuer decides to impose a new annual fee or raise the current one, they're required by federal law to notify you 45 days in advance. You can choose to reject the new annual fee. However, if you do, you’ll likely need to close your account.Recommended: Credit Card Terms, Explained
Which Credit Cards Typically Have Annual Fees?
Not all credit cards have annual fees, but certain types of credit cards often do. Here’s a look at the kinds of credit cards that may charge annual fees.
Premium Credit Cards
Premium travel credit cards will typically charge an annual fee since they offer extra benefits like flight and hotel upgrades, travel credits, and no foreign transaction fees. If you travel frequently, travel credits and freebies can offset (and likely exceed) the annual fee for the card
Reward Cards
The best rewards credit cards offer you a "reward" for using the card, such as cash back for spending in certain categories and points for every dollar you spend. Depending on the card, you can redeem your rewards for checks, statement credit, merchandise purchased through the card company, gift cards, and/or travel perks. There are some reward cards that do not charge an annual fee, but some of the better reward cards do.
Secured Credit Cards
Secured cards are designed for people with poor or limited credit, and can be a good way to build (or rebuild) your credit. You typically must pay a cash deposit up front to guarantee your credit line, which acts as a safeguard for banks to cover any purchases, should you miss payments. Some secured cards also come with an annual fee to help offset the risk involved and make secured cards financially worthwhile for the issuer.Recommended: Best Credit-Building Cards
How Credit Card Annual Fees Are Charged
Credit card annual fees are typically billed as a yearly one-time charge during a specific month of the year. This is often the anniversary of the date you opened the card, though it might be at the beginning of the calendar year. Less commonly, a credit card issuer might break the fee up and charge it as a monthly fee. The annual fee on a credit card is separate from any interest chargers and is charged whether or not you carry a balance from month to month.
Paying the Annual Fee on a Credit Card
Typically, an annual fee will show up on your credit card statement once a year as a lump sum charged to your account. When you see the charge, you pay it in the same way as you pay for purchases. It is due on that statement's payment due date.Some cards that charge an annual fee may waive it in the first year in order to attract new customers. After the first year, the fee is automatically charged to your account.
Avoiding Credit Card Annual Fees When It’s Not Worth Paying
Paying an annual fee isn't necessarily a bad thing. If you use all the rewards that come with your credit card, the fee can more than pay for itself. If you’re new to credit or have poor credit, a secured card with a fee can help you build your credit profile and eventually qualify for a no-fee card.However, if you do not plan on taking advantage of the perks offered by a card that comes with an annual fee, you may want to choose a credit card that has no, or a low, annual fee.If you already have a card that charges an annual fee, you might consider contacting the card issuer to see if your fee can be waived or if you can switch to a no-fee credit card with the same issuer. If you can’t get the fee waived or switch to a no-fee card, you could consider closing the account — just be sure to use up your rewards beforehand. Also keep in mind that closing the account could negatively impact your credit by reducing the amount of credit you have available (which affects your credit utilization ratio — how much of your total available credit is being used). Your scores will likely rebound in a few months, however, if you continue to make all of your payments on time.
The Takeaway
Credit cards with annual fees can offer value that may offset the cost of the annual fee. However, you’ll want to weigh the value of these benefits against the cost of the annual fee regularly to make sure you are still getting a good deal from your annual fee credit card.If you’re in the market for a new credit card, it can be a good idea to compare credit card rates, as well as fees, rewards, and benefits, before you apply. With Lantern by SoFi’s online credit card marketplace, it’s easy to compare multiple credit card offers (including no-fee, rewards, and credit-building cards) matched to your needs and qualifications all in one place.
Frequently Asked Questions
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About the Author
Jason Steele
Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
