Yahoo Finance Is Your Credit Card Worth the Annual Fee?
Credit cards with annual fees often promise big perks and more rewards per dollar -- but if you're not planning on spending thousands on your credit card, you could end up in the red.
Among the 2,202 credit cards NerdWallet examined in its 2015 industry study, the average annual fee was $58. So if you earned 3 percent cash back on all purchases, which is a high rewards rate, you'd have to spend almost $2,000 a year with your card just to break even.
Wondering whether your annual fee card is a keeper? Here are three times that fee is worth it and three times it's not.
Worth It
1. When the perks outweigh the fee.
Say your credit card has a $100 annual fee and comes with access to hundreds of airport lounges, but you use it only for a few small, recurring purchases. If you frequently use airport lounges, which cost upward of $30 per visit, keeping the card would still be worthwhile despite your low spending.
The same goes for other benefits. If the perks you get from annual travel credits, anniversary bonuses or elite status exceed the card's annual fee, keeping the card may also be a good idea, even if you aren't spending as much as you once did.
2. When you're a big spender, and you earn more points with a higher rewards rate.
Suppose you have a credit card with a $90 annual fee and unlimited 5 percent cash back on purchases at grocery stores. The fee is high, but if you spend $10,000 a year on groceries, your net rewards would be $410, making the card an outstanding value.
In this case, the card's rewards handily cover its annual fee. You'd be hard-pressed to find a no-fee card with a similar rewards rate.
3. When you can't qualify for a no-annual fee card.
Secured credit cards for people with damaged credit also tend to come with annual fees. If you have one of these cards, though, you're likely focused on rebuilding your credit, not earning rewards.
Your annual fee may be in the neighborhood of $30, but as long as the issuer is reporting your account activity to all three major credit bureaus and you're boosting your credit score, it might be worth the cost for now. Once your credit improves, consider switching to an unsecured card without an annual fee. (Alternatively, if you're on a tight budget, getting a share secured loan or credit-builder loan through your bank or credit union could be a less expensive way to build credit.)
Keep in mind, you should avoid some secured credit cards. Some charge hundreds in annual fees and don't report to all three credit bureaus. Pay special attention to the fine print before applying.
Not Worth It
1. When you're paying the annual fee just for a concierge service or rental car insurance.
Price protection, concierge service, lost luggage reimbursements, extended warranties and rental car insurance are often heralded as premium benefits worth a large annual fee. But plenty of no-fee cards -- including cards from American Express and Discover, and cards with the Visa Signature and World MasterCard logos -- come with these perks.
2. When the benefits don't match your needs.
About 1 in 5 people didn't redeem their credit card rewards last year, the NerdWallet study found. If your rewards balance is gathering dust, it could be time to switch to a card with more useful benefits.
You might also want to consider another card if you're carrying a large balance. While annual fee cards often come with big rewards, they also tend to come with steep APRs. You might be better off moving your debt to a balance transfer card with low interest.
3. When you're juggling multiple annual fees each year, but you don't spend much.
If you have more than one rewards credit card, you're in good company: The average consumer has about two rewards cards, according to the Federal Reserve Bank of Boston. But if all your cards carry annual fees, you'll have to increase your overall spending significantly to come out ahead.
Suppose you had three cards, each with an annual fee of $58 and an average rewards rate of 3 percent. You'd have to spend $5,800 before breaking even on your rewards -- triple what you'd need to spend if you had just one rewards card.
If you spend less, you'd probably be better off switching over to some no-fee cards and paring down your collection of costly plastic.
The Next Step
If you've decided your credit card is no longer worth its annual fee, you generally have two options: convert it, or cancel it.
-- To convert: Call your issuer and ask if you can move your account to a no-fee card. Often, you'll be able to keep your original account number, so your average age of accounts, a big factor in your credit score, won't drop. If you're converting to a less premium product, the move generally won't trigger a hard inquiry on your credit report that would lower your credit score.
-- To cancel: Move all your automatic payments to other cards before breaking up with your issuer. If your rewards expire upon account closure, make sure to redeem them beforehand. Call your credit card company to close your account.
Despite the high rewards rates and perks, credit cards with annual fees aren't always worth the cost. Next time, look for a credit card that complements your spending needs, and you'll earn more in the long run.
More From US News & World Report
