Is Paying a Credit Card Annual Fee Worth It?
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If you’re looking to pay off your regular expenses and strengthen your credit in the process, consistent use of one or more credit cards is a great way of doing it, as long as you can handle whatever monthly bills come your way. Furthermore, most credit card companies offer different types of cards, many of which come with a number of benefits.
The only problem is that many rewards-based credit cards come with hefty annual fees, so many consumers are starting to question whether it’s actually worth it to apply for them at all. Keep reading if that’s something you’ve been wondering.
Learn more about how to choose the right credit card for you.
What’s This Annual Fee About?
As mentioned, the majority of credit card providers in Canada will offer you a range of credit cards, each of which has different approval requirements, costs, and payment plan conditions. Some are free to use, save for the cost of your monthly balances and interest rate.
However, others come with a yearly fee in exchange for various benefits, including but not limited to:
- Reward points (airline, in-store credit, etc.)
- Insurance packages (auto, travel, etc.)
- Free or low-cost roadside assistance
- Airport lounge access
- Discounts on goods & services (gas, groceries, etc.)
- Rental car coverage
- Cash-back programs
- Balance payment alternatives (points, etc.)
All this said it’s important to learn everything there is to know about a credit card before you apply for it, as vendors will try to sweet-talk you with lavish offers that may or may not pay off in the end. For instance, a signing bonus of 15,000 free travel points sounds awesome until you realize that those points equal just a few dollars and are only redeemable for short-haul domestic flights.
Check out some of Canada’s best Aeroplan credit cards.
Then again, every dollar you save can benefit your finances in the long run and if you’re a regular credit user, a rewards card may be the perfect payment method for you.
Why Do Credit Card Companies Charge Annual Fees?
Simply put, credit cards, like any product, are all about the revenue they can generate for the companies that produce them. They are usually marketed toward various groups of consumers. Airline rewards cards for anyone who travels often, in-store credit cards for those that frequently shop at the same locations. Whoever the consumer happens to be, a top tier company can supply them a credit card to match.
Does it cost these companies anything to manufacture, ship, and sell all these different credit cards? Of course, but they certainly make their investment back and more, especially when their products are advertised by big-name financial institutions.
In fact, big banks or credit unions are the lenders that can offer you the broadest selection of credit cards, as long as they’re partnered with at least one of Canada’s major suppliers, such as Visa, MasterCard, or American Express.
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When is it a Good Idea to Pay the Annual Credit Card Fee?
So, let’s discuss the issue at hand; whether paying your credit card’s yearly fee is actually worth the time and money you’ll put into it. As frustrating as it sounds, the answer will vary greatly depending on your finances, creditworthiness, and spending habits.
Overall, paying the annual credit card fee is really only worth it if you:
- Have a solid income, a healthy credit report, and a decent credit score
- Can access favourable payment terms, interest rates, and credit limits
- Use the card almost every day
- Take advantage of all the perks within a reasonable time frame
- Are able to handle your monthly payments responsibly
- Plan to use the reward points to pay off your outstanding balances
There are also some deals that you can acquire through your bank or credit union, where if you sign up for one of their more expensive premium accounts, they will waive the card’s annual fee. Unfortunately, you could simply end up paying the equivalent in banking fees (or more) if you don’t stay above a specific monthly account balance.
Nonetheless, people that use their credit cards all the time can definitely rack up enough rewards to justify their annual fee. All in all, enough points collected on the right card can get you a free red-eye flight to the destination of your choosing and even some discounts on hotel stays, meals, shopping, and rental vehicles. That, coupled with the fact that responsible credit usage is good for your credit report and financial status can make any annual-fee-card a wise choice for the average Canadian consumer.
Check out how a credit card can improve your credit score.
When is it a Bad Idea to Pay the Annual Credit Card Fee?
While plenty of rewards cards have annual fees that seem affordable at a glance, you could just waste your money if you don’t use them to their full capacity. Many of these cards cost well over $100 per year (upwards of $200-$400 for some platinum cards).
Depending on what percentage of cash you actually earn back through your rewards program, you might have to spend hundreds, maybe thousands of dollars before you can even cover the fee itself.
All this to say that a card with an annual fee may not be a great idea when you:
- Have a low income, bad credit, a lot of existing debt or other financial issues
- Work part-time, freelance, by contract, or are unemployed
- Can’t afford to make more than minimum or partial balance payments
- Don’t use your insurance, points, or other benefits consistently
- Have compulsive spending habits but not enough savings to support them
- Are below or above various age groups (young consumers often have spending problems, seniors get extra benefits with some cards up until a certain age, etc.)
For example, one element about credit cards that can be both a benefit and a drawback is that you’ll have the option of making minimum or partial monthly payments to avoid any late penalties. Sadly, that habit can become extremely problematic because you’ll be charged interest on every dollar that goes unpaid.
In addition, carrying too much outstanding debt can gradually decrease your credit score and damage your credit report as a whole. Not to mention the fact that many credit cards, particularly reward-based ones, come with interest rates starting at 19.99%, which will only get higher if you don’t have amazing finances or credit.
Do you have too much credit card debt? Here are 8 steps to reduce your credit card debt.
Would You Rather Earn Rewards or Save Your Money?
When all is said and done, it can still be tough to decide whether or not to apply for a credit card with an annual fee. If you don’t have stellar finance, it’s probably safer to look for a no-fee card, many of which still come with a few benefits that you can rake in. If you have a solid income, good credit, and find a premium card that you’ll use all the time, fantastic because the rewards can certainly be worth the annual fee.
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