Credit Card Annual Fees: Are They Worth It? (2024)

A credit card annual fee is simply a flat ownership fee for each year a credit card account remains open. Not all cards have annual fees and the ones that do vary in how much they charge. Annual fees are, unsurprisingly, not popular. While they are a visible metric for comparison, it’s important to remember their cost is just one factor in a credit card’s overall cost-effectiveness and one of many ways credit card companies look to make money.

Annual fees are often charged as a way to compensate for other aspects of a card that are especially beneficial to the cardholder. This includes access to special perks and features or other above-average rewards. Annual fees can also be found on cards geared toward riskier customers—like those with poor credit,who might otherwise have a tough time receiving approval for a card. In this case, the annual fee offsets some of the issuer’s risk, making easily-accessible cards financially worthwhile for the issuer.

Credit card annual fees are typically first paid at the outset of opening an account, meaning an initial payment will “cover” the fee for the subsequent year’s time. Occasionally, an annual fee may be divided into monthly installments, payable along the same lines as the card’s billing cycle. Most common, however, is for an annual charge to be billed on the anniversary month of the account’s opening and for this to repeat for however many years the account remains open.

That said, many credit card waive the annual fee the first year, as incentive for you to sign up for that particular card.

Here are some of the factors prospective cardholders should consider when comparing credit cards with annual fees:

Ongoing Memberships and Benefits

Many cards set themselves apart by offering ongoing perks simply for being a cardholder. This is particularly prevalent withtravel credit cards. Mid-tier airline cards, for example, usually cost around $120 per year and offer perks like priority boarding and free checked bags. Hotel cards typically extend elite status in loyalty programs, providing benefits including room upgrades or late checkout. Someone traveling just once or twice a year could break even with an annual fee, in that scenario.

Premium cards, which can charge between $400 and $699 in annual fees per year, offer those perks and often much more. Common benefits may include hotel and rental car chain elite status, airport lounge access, travel insurance or discounts on travel booked through the card’s own travel agency. Frequent travellers who use these benefits can receive much more value despite the higher fee—but only if they take advantage of the perks.

Annual Credits and Bonuses

Looking for a reason to renew a card membership year after year? Several credit cards with annual fees offer annual credits.

For example, The Platinum Card® from American Express, offers a $200 annual travel credit and a $100 NEXUS statement credit. When you couple that with the dollar value of its points earnings, travel insurance and perks, they help offset its high annual fee of $799.

With hotel credit cards, annual fees come in exchange for perks and award nights. However, there are usually stipulations for who can qualify and what hotels they can be redeemed at.

One-Time Welcome Bonuses

Big welcome bonuses often come with fees. For example, the CIBC Dividend Visa Infinite card has a $120 fee. However, as a welcome bonus, 10% cash back is earned on the first four statements (up to $2000 spending limit) and the annual fee is waived the first year. That’s a $200 cash back value right off the bat, after which it moves into the cards regular earning rates.

Many cards waive the annual fee in the first year, but all fees apply beginning in year two. Because of this, one should consider the long-term implications of applying for the card. Is the card still a good deal in the long run when the annual fee must be paid but the cardholder no longer receives a welcome bonus? For some, the long-term benefits and rewards will still outweigh the annual fee.

Rewards Rate

Up until this point, many of the arguments for paying an annual fee are most applicable to frequent travellers who can take advantage of included benefits. Even if one doesn’t travel, being able to earn cash back at higher rates might make a credit card annual fee worth it.

For instance, the BMO Cash Back World Elite Mastercard comes with a $120 annual fee. So, going with the lower-tier, no-annual-fee version of the card, the BMO Cash Back Mastercard, may seem like the smarter choice. However, the World Elite card has a much higher earn rate on cash back, earning 5% on groceries, 4% on transit, 3% on gas, 2% on recurring bill payments and 1% unlimited cash back on all other purchases. The no-fee card only earns 3% on groceries, 1% on recurring bills and 0.5% back on everything else. When we crunched the numbers, based on average Canadian yearly spending, we found that the BMO Cash Back World Elite would earn Canadians $490.07 in cash back, even with the annual fee factored in. The BMO Cash Back Mastercard, on the other hand, earned only $289.24. You can see, in this case, that the cash back earnings make the higher-end card well worth the fee.

To determine whether paying an annual fee is worth it in exchange for increased rewards, calculate how much you expect to earn at the higher rate and subtract the annual fee. Then, compare that to what you’d earn from a card without an annual fee. In many cases, the annual-fee card will outdo its competitors.

Be Realistic When Evaluating Cards

Like any credit card, many cards with annual fees look great on paper but don’t prove as advantageous when the fine print is considered. The Platinum Card® offers plenty of airport perks and travel insurances, but if you find that you don’t fly often, you won’t get the value of those perks.

Other perks purposely require the cardholder to jump through hoops to use them. Be realistic about how much time and effort you want to put into getting a reward.

When evaluating cards, it’s important to recognize which perks one would use naturally and which would provide value only through a concerted effort to use them. It’s not recommended to pick cards that would necessitate a change in one’s spending habits to be of value, even if the perks seem generous. Remember that the card should fit the individual, not the other way around and that an unused credit is no credit to your wallet at all if it’s charging an annual fee.

It can feel counterintuitive to pay a fee for the ability to spend money, especially considering that there are some great no-annual-fee cards on the market. So when are annual fees actually worth the cost?

For the most part, credit cards with annual fees offer more than a financial relationship. They bundle memberships, perks, insurance coverage, cash credits and rewards for a flat rate. In choosing the right card, an annual fee adds up to big savings compared to buying the same services à la carte. Of course, this is entirely dependent on how many benefits the cardholder will actually take advantage of.

When it comes to evaluating credit card annual fees, consider these five important factors:

• Ongoing memberships and benefits
• Annual credits and bonuses
• One-time welcome bonuses
• Rewards earning rates
• Travel insurance coverage

In some cases, a single factor might be enough to justify a credit card annual fee. An annual bonus worth $100 can cancel out a $95 annual fee, with any further perks simply serving as icing on the cake. Or, if you pay for travel insurance out of pocket a few times per year, that could easily make the $120 fee worth it. For other cards, one might need to consider several factors to determine if it’s a good fit.

Lifestyles change and so do card benefits. A credit card that’s a good fit one year might not be the next. It’s worth looking over a credit card’s perks, rewards and other upsides each time the renewal fee is due to see if the benefits still outweigh the cost. Those who say “no” still have several options to save on a credit card annual fee.

Some accounts might be eligible for special offers to retain a customer, including waiving annual fees—it never hurts to contact your card issuer and ask. In other scenarios, the cardholder might be able to downgrade to a card with lower cost (and fewer benefits) or even change to a similar card without annual fees. Some cards offer to waive an annual fee for the card’s first year as a way to attract customers.

Ultimately, a credit card that costs more than it’s worth should be canceled. This must be considered as a last resort because canceling cards can impact one’s credit score by decreasing available credit and increasing a credit utilization ratio. Still, if money is tight and one’s score can probably rebound, nobody should consider themselves locked in—they should just determine whether they qualify for an annual fee refund before making any permanent changes.

Consider: Prepaid Credit Cards

Credit cards with an annual fee shouldn’t register as an automatic “no.” Instead, it’s worth taking a close look at the overall cost-benefit, as it’s possible perks and bundled rewards will at least make up for the cost of the fee. While all credit cards represent a compromise between pros and cons, these benefits will tip the scale in the cardholder’s favor if their habits are particularly well-suited to the nature of spending the card rewards.

As always, shoppers should approach each credit card critically and regard shiny rewards skeptically. Credit cards are one area in which half truths and orthodox thinking abound, mostly to the detriment of consumers—so keep an open mind and consider cards such as those with annual fees that, for a price, could provide game-changing advantages.