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When it comes to choosing a credit card, Canadians have plenty of options. Whether you’re looking for travel perks, grocery store discounts or cash back, you’ll have your choice of cards, but let it be known that they’re not all created equal. Typically, the better reward that a credit card offers, the higher the annual fee tends to be. You may also encounter annual fees with zero perks if you fall within the subprime market (bad credit). Before you choose a card, it’s wise to understand your options because in many cases, those annual fees are quickly offset by the valuable perks. Take some time to learn more about annual fee credit cards and see if they might be the right fit for you.
What Are Annual Fees?
Some credit cards charge users an annual fee simply for possessing the card. This means you get charged this amount every year, regardless of how little or how often you decide to use the card. You’re required to pay this fee whether you carry a balance or not, as your credit behaviour does not play a role. Annual fees typically range anywhere from $40 – $150, while some high value perk cards can cost even more.
What Do Annual Fees Cover?
Annual fees are a way for credit card companies to offset the cost of offering cardholders unique incentives and benefits. They wouldn’t be able to provide that extra value without charging a fee, so each year, your annual fee is your payment for being able to access those extra perks you wouldn’t get with a no annual fee card.
Why Would I Want To Pay For An Annual Fee?
There are a few common reasons you may be swayed to pay an annual fee for a credit card:
- The card offers ongoing travel perks that equate to more value than the fee itself. If you travel a lot, or wish you travelled more, paying an annual fee for a card that aligns with your travel goals could pay off big in the long run. Some travel cards may offer general perks like free car rental insurance, lost baggage coverage or double rewards points on foreign transactions, while others are more brand-specific and will reward you for being loyal to specific hotel or airline partners each time you travel. Either way, if the perks add up to more than the annual fee, it’s likely a solid return on investment.
- Signing up for the card could net you a one-time bonus that justifies paying the annual fee. There are many cards that will offer incentives to get you to sign up and could include things like enough frequent flyer miles for a roundtrip airline flight, an impressive amount of rewards points you can redeem for gift cards or a generous amount of statement credit that you can use to offset some of your purchases. Do keep in mind that you’ll want to make sure the sign-up incentive is worth more than just 1 year of the annual fee so it’s worth your time and investment up front.
- Earning rewards just for using your card to pay everyday expenses can greatly offset the cost of an annual fee, but not all cash back cards are created equal. Cards that offer 1% cash back on all purchases or on specific categories that change monthly, are a dime a dozen. Cards that offer a higher percentage of cash back on necessity purchases are not, so to get a deal like that, you’ll likely be paying an annual fee. If you can earn a higher percentage of cash back on necessities like groceries and gas, it’s likely the cost of the annual fee won’t even be a factor.
- Unfortunately, annual fees aren’t always offered in exchange for a reward. Sometimes annual fees are a requirement when you have poor credit and are applying for a credit card to rebuild your credit score. The key here is to use these cards until you’ve achieved an improved credit score that will get you access to better rewards and rates, and then make the switch.
What To Know Before Getting A Credit Card With An Annual Fee
Annual fee cards are not always the best choice for everyone. Typically, they’re most valuable when they align with your buying/spending habits, so think about what you buy most and what kind of incentive you’d need to charge those expenses instead of using your debit card or cash.
It’s also important to be aware that your card’s rewards and fees can change year by year so it’s wise to stay updated on an annual basis to ensure the perks are still offsetting the fees. You should also be aware of when the fee will be charged so you know in advance when to expect it on your statement. If you’re on a strict budget or on a fixed income, the last thing you’ll want is an unexpected expense showing up on your credit card statement.
If you use your credit card frequently enough, a card with an annual fee is likely worth it when it comes to the tradeoff of perks or cash back. As long as you’re borrowing responsibly and the value of the incentives outweighs the fee, then it’s likely the card will pay for itself each year.
Credit cards with annual fees are not the right fit for everyone, and there are plenty of other no-fee credit card options to choose from. Determine what your priority is and choose a credit card accordingly. If you’re looking for cash back to reward you for charging most of your everyday purchases, opt for an annual fee card. If you’re looking to reduce your interest rates because you tend to carry a balance, look for a card that offers a balance transfer option or lower interest rates across the board.
No matter which card you choose, remember that spending responsibly and paying your credit card bills on time has a big impact on your credit score, credit history and ability to access better rates in the future.