Is It Wise to Pay an Annual Fee on a Credit Card?
By Tracy L. Hirsch
Here’s how to know when it’s worth it, and when it’s best to seek alternatives.
Everyone knows that certain charge cards and credit cards come with an elite social status. American Express has built an empire by creating advertisements with A-list celebrities who use their charge card. These ads tell us, as consumers, that we too will experience the perks of being rich and famous if we use their card.
While that’s usually not true (you would have to have a multi-million dollar net worth to live the same lifestyle as an A-list celebrity), the part that is true is that there are greater rewards from charge cards and credit cards that have an annual fee attached.
Before you apply for one, you need to assess two important deciding factors. First, will you actually obtain the rewards, points, and perks that you want in regards to your travel habits and the amount of money that you spend?
Second (and just as important as the first), are you able to responsibly pay off your credit card balance in full every month? If not, you’ll end up paying an annual fee and lots of money in interest. That’s not a good situation for anyone.
The majority of bankruptcy attorneys in Louisville will tell you that credit card debt is one of the top reasons that people need to file for bankruptcy (in addition to unpaid medical bills and overbearing student loans).
To avoid this, when using a credit card, it’s imperative to know that you can pay it off in full every month. In the case of an emergency, it’s important to make large monthly payments so that you can get it paid off in a few months instead of a few years.
If you feel confident that you’ll only charge an amount that’s equivalent to or less than the amount of income you bring in every month, then a credit card or charge card can provide wonderful perks.
Annual fees can work in your favor or put you in the red. Here’s how to know if it’s worth it for your personal situation.
If you’re considering applying for a card with an annual fee (or already have one), how do you know if it’s worth it to pay $95, $125, or even $150 per year? Here’s the breakdown:
1.) Is it being used for business expenses or personal expenses? Many credit cards and charge cards that have an annual fee attached offer better rewards and travel perks than cards with no annual fees.
So if you own a business, using your card for large purchases (inventory supplies, electronics, etc.) may get you a decent amount of airline miles, as well as discounts on dining and hotels. In addition, charge cards like American Express offer luxury travel lounges at all major airports, and that can be a big plus for a businessperson who’s always traveling.
If you’re able to pay off the balance in full every month, and you travel frequently to meet with clients, attend seminars, and so on, a card that offers triple points for airline miles or 5% cash back on business-related expenses is a good choice.
For example, if your annual fee on a credit card is $95, and you rack up enough points to get a free roundtrip to the west coast, you’re seeing a great return on your investment.
A weekend roundtrip ticket from Kentucky to California could easily cost around $500 (and even more during peak travel season), so if you get a free flight in exchange for your annual fee, you’re basically only paying $95 for that roundtrip ticket, which saves you $405.
If you’re using your card for personal expenses, such as groceries, oil changes, and gas, you most likely won’t obtain enough points or earn significant miles to justify the annual price tag. There are other credit cards without an annual fee that offer cash back and miles, which could be a better option.
If you’re not really using any of the perks and don’t travel, you could be paying a hefty annual price tag without reaping any benefits. If you’re paying for a card that has a high annual fee, it may be time to trade it in for a card that gives you different perks (cash back on gas and groceries) without the yearly fee.
2.) Do you travel and go out to eat frequently? I’m going to piggyback off of my first point to delve into the travel and dining perks a little more. Not all business owners travel for work, and many people (whether they are entrepreneurs or not) travel for fun.
Either way, if you like to travel and dine out, a card with an annual fee will provide a solid return on your investment. Even if you only travel within the Unites States, you can get rewards and discounts for hotels, flights, and restaurants.
Let’s say you don’t even travel, but you eat out four or five times a week at restaurants in the greater Louisville area, you’ll still solid rewards in exchange for your annual fee. However, if you’re someone who never travels and rarely goes to restaurants, you most likely aren’t getting a return on your investment.
3.) How much do you spend every year? When it comes to credit cards, the more you spend, the more rewards and points you earn.
So let’s say the particular charge card or credit card you’re considering offers 5% cash back on certain restaurants or a specific amount of airline miles, it’s important to know how much you have to spend in order to obtain those rewards.
If you have to spend $10,000 annually to earn enough airline miles for a free domestic roundtrip flight, but you only charge $2,000 a year onto your card (plus pay the annual fee), you’re not getting any benefits. So before you apply for a credit card or charge card with an annual fee, be sure to do your homework.
Research all of the perks, rewards, points, and cash back, along with the disclaimers that come with them. Not every single purchase qualifies for cash back or rewards, so it’s important to read the fine print.
As you can see, there are upsides in applying for a card that has an annual fee, but only if you meet the requirements for the rewards. Do you currently have a card with an annual fee? Do you think that it’s worth it? Give us your thoughts in the comments below!
All the best,
Tracy L. Hirsch
Kentucky Bankruptcy Attorney
Need a free consultation? Text or call me at (502) 435-2593!