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What is an Annual Fee on a Credit Card? Is it Worth It?

on 16 Jun, 2019

As of 2016, Canada had over 43 million credit cards in use. That number has been trending upwards over the last decade or so for a variety of reasons.

We suspect that, the flexibility credit cards give people in financial pinches and the additional spending power credit cards give well-to-do holders are the primary reasons why they have flourished in popularity.

If you’re considering getting a credit card, you may have browsed over a few applications and were met with something called an “annual fee”. If seeing an annual fee tacked onto to a card you were interested in has left you scratching your head wondering, “What is an annual fee on a credit card?” Our team at Insurdinary has you covered.

Below, we step you through key credit card considerations regarding fees and help you to understand if a credit card with an annual fee is worth having.

What Is an Annual Fee on a Credit Card?

A credit card’s annual fee is a flat rate that’s charged to your credit card account every year on your membership anniversary. Fees typically range from $40.00 to hundreds of dollars.

With some cards, your annual fee gets charged on a quarterly basis. This, however, is rare.

Annual fees are always disclosed to credit applicants on their application. In theory, this information should be clearly stated on a card’s landing page.

If it isn’t, you’ll want to look over your card’s fine print to find relevant fee information or call the credit card provider in question to discuss fees with them in-depth.

Are Annual Fees Refundable?

Many people that have credit cards aren’t aware of the fact that in some cases, annual fees are refundable/avoidable.

If you pre-pay your annual fee and then later decide that you don’t like the credit card you have, you can call to have your card cancelled. Post-cancellation, you may be refunded your annual fee on a pro-rated basis.

Furthermore, if you call your card company at end of the year and ask to have your annual fee waived, they may accommodate based on how good of a customer you are. Telling your credit card company that you’re considering transferring your balance to a non-fee card can help get you a “yes” when requesting a fee waiver.

Just be aware that you’ll need to request a new waiver each year.

Why Do Some Credit Cards Have Annual Fees and Others Don’t?

Now that we’ve answered your primary “what is an annual fee on a credit card” question, you may find yourself wondering why certain credit cards impose fees at all while others don’t.

There’s no one-size-fits-all answer as to why some cards charge annual fees and others choose to stay free. Theoretically, it comes down to the value that your credit card is offering but that isn’t always the case.

For example, a credit card that offers very little in the way of competitive benefits could charge you an annual fee. While doing so would certainly hurt their ability to get applicants, some card companies bank on netting the occasional non-informed consumer.

Credit cards that boast a bevy of benefits (many of which we’ll discuss in a moment) like cash-back, bonuses and member services have a much higher likelihood of carrying fees than non-perk cards.

Also, cards that are open to sub-prime borrowers may charge annual fees. They do this in order to insulate themselves from losing too much should a borrower default on their payments.

So, What Makes a Card With an Annual Fee Worth It?

As we just mentioned, benefits and openness to a wider range of borrowers are what entice consumers to spend money on a particular credit card. In theory, the benefits that you get from a card should outweigh what you spend on your card annually.

Below, we discuss in-depth some of the key advantages annual fee credit cards might include.

Sign-Up Bonuses

There are credit cards in the market that pay you to sign up for them. These credit cards boast bonuses worth anywhere from a couple of hundred dollars to thousands.

All you need to do to obtain these bonuses is apply for the card, get approved and spend a certain amount of money within a certain period of time.

The larger the sign-up bonus that’s being offered, the more money you’ll have to spend in order to qualify for the bonus and the higher your card’s annual fee might be.

Cash Back Rewards

Even after you receive a sign-up bonus, many credit cards will keep paying you for being a loyal customer. This continued payment comes in the way of cash back rewards.

The way rewards work is that your credit card company will give you a certain percentage back on all purchases that you make.

For example, a credit card that offers 2% cash back would give you $2.00 back for every $100.00 you spend. That doesn’t sound like much but it can certainly add up over time.

If your credit card of choice offers high cash back bonuses in certain categories like groceries, fuel and online purchases, that card will likely carry a higher annual fee to offset its value.

In case you’re curious, the cash back bonuses credit card companies give you is really just a means of profit sharing.

Every time you insert your card, credit card companies charge vendors 2-5% of your transaction total. After receiving this cut, they then share a percentage of that with you as an incentive to keep using your card.

Anniversary Perks

Some credit cards will have recurring annual bonuses that are actually worth more than what companies ask for as an annual fee. This is particularity common with airline credit cards since they like to give away free flights.

If you travel a lot and the airline ticket you get as an annual perk is worth more than the fee you’re paying, your annual fee is 100% worth it.

Member Services

Free rental car insurance, online purchase protection, concierge services…

These are all example perks that some credit card companies will award you for being a member. In general, the more plentiful the perks, the more likely that your card will carry an annual fee.

Low Interest Rates

Low interest rates don’t usually correlate with annual fees. They might though if an interest rate is particularly aggressive.

If you tend not to carry a balance on your credit card, paying an annual fee for an aggressive interest rate wouldn’t be of value to you. In any case, chances are if you’re just in the market for an excellent interest rate to pay for things like medical expenses and have good credit, there’s a solid fee-free card out there for you.

Branding

Here’s the credit card perk that you don’t want to pay for… Branding. It might be that a credit card issuer has marketed its card as being the card of choice for elite spenders.

Many times, those cards carry hefty annual fees and give very little to cardholders in return.

Why then do people fill out applications for these cards? Mostly because they want to put off the image that they’re part of the luxury demography that a card positions itself as being for.

Do yourself a favor and don’t pay steep annual fees if the return value just isn’t there.

Summarizing What Is an Annual Fee on a Credit Card and Is It Worth It

To wrap things up, if you’re asking yourself “What is an annual fee on a credit card?”, an annual fee is just a charge that your creditor will put on your account every year.

Whether or not paying that charge is worth it versus if you should opt into a non-fee card is up to you.

Almost always, people who pay annual fees on their credit cards have worked out that they’re likely to make more in the way of perks than they’ll spend on their fee. We recommend that you take the time to deduce the same thing prior to spending big bucks on a credit card that isn’t bringing you big benefits.

Not sure what credit card is the best fit for your lifestyle? Our team at Insurdinary understands your pain and is here to make your card finding experience simple.

We’ve built a directory for Canadians just like you that allows you to search out a variety of cards for business, students, rewards, everyday spending and more.

If you’re interested in finding the perfect credit card to suit your lifestyle now, you can access our card finding tools right here!

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