Paying for a credit card seems counterintuitive unless you’re reaping the rewards.
Therein lies the problem. Do the benefits outweigh the cost?
Unfortunately, it depends. Fortunately, we’ll break it down to help you decide.
What is a credit card annual fee?
A credit card annual fee is like a membership fee for owning the card. It’s due when you open the account. These fees can range from around $49 to $699. The higher the credit card’s annual fee, the better the rewards (think airline miles or cash-back opportunities).
This is what we’ll investigate.
NOTE: While a high-end credit card may come with more perks like access to premium events, emergency medical travel insurance, or airport lounge access, you’ll typically need an excellent credit score and a minimum level of income to qualify for these cards.
Pros and cons of an annual fee credit card
Here are some factors to consider when figuring out whether an annual fee credit card is worth it.
The cons of an annual fee credit card
Aside from the obvious annual fee, there may be a higher annual percentage (APR), so the cost can quickly outweigh the benefit if you’re not paying off your bill in full every month.
Also, shopping for the “right” credit card can take long hours to figure out which card is the perfect match for your needs. A credit card provider may deny your approval for a card which can affect your credit score.
The three pros of an annual fee credit card
While it takes a spreadsheet to compare all the reward credit card benefits, here are some perks and benefits that may come with being a member:
Perks and benefits: from airport lounge access, insurance and more
Airport status. A good travel credit card may include priority check-in and boarding. You’ll often get your first checked bag for free, and if they lose your luggage or it's stolen, your credit card could pay around $500 towards replacing the items (depending on the card you have).
Insurance you don’t have to pay for. You’ll often get flight delay or cancellation insurance, rental car insurance, and possibly emergency medical while abroad. Finally, you may get a companion voucher so your partner flies free. Many travel cards and cash back credit cards include insurance for your mobile device and extensions on your warranties.
Hotel status. Hotel credit cards may give you free nights, room upgrades, and late checkouts. A free night alone could make the annual fee worth it.
Hanging with the elites. Premium credit cards, the ones that cost between $400-$700 per year will often give you broader access to airport lounges around the world, elite status at rental car locations, and access to pre-sale tickets for events and concierge services.
If you’re always travelling, you may value the added comforts and protection—the annual fee could be worth it.
The immediate cash credits and welcome bonuses
Annual fee waiver. Often, when you first sign up for a card, they’ll waive the annual fee altogether in an effort to prove its worth to you.
NEXUS fees. If you’re a frequent flyer, many of the providers offer a NEXUS rebate, meaning they’ll pay for your application and processing (or a portion thereof).
Welcome bonus. Some of these cards offer a welcome bonus just for joining. While you may pay a $120 fee, after a few months, depending on the card, you could earn enough to negate the annual fee completely (and a free flight to a local destination).
The rate at which you earn rewards to offset the annual fees
Airport lounge access, NEXUS rebates, and insurance alone make a credit card annual fee worth it for frequent flyers.
Your earn rate significantly increases with higher-end cards. For example, you’ll get 2 points per dollar spent with partners of the credit card (e.g. 2 Aeroplan points per dollar spent on Air Canada with the many Aeroplan credit cards).
If you’re more of a cash back credit card user, you must look at the finer details. So, let’s do that.
Is a cash back credit card worth it? A Koho card example
KOHO’s Extra card gives you 2% cash back on groceries, bills & services, eating and drinking (think restaurants and SkipTheDishes), and another 0.5% on all other purchases. You can earn extra cash back at selected merchants, too (e.g. 3% at Chef's Plate, 1.5% at Well.ca, and 5% at Frank and Oak)—all for $84 annually.
But maybe the best part is that it’s a reloadable prepaid Mastercard so there are no hidden fees from interest charges.
So, let’s do the math and see if this annual fee card is worth it.
According to Canada’s food price report, a family of four will spend $1,357.37 (or $339.34 per person) per month
According to Statscan, the average spend on electricity, gas, and water is $2,535 per year (or $211.25 per month).
According to the Toronto Star, the average cost of Internet is $95 per month
While cell phone prices vary widely, let’s assume about $75 per month.
Let’s say you subscribe to at least two services (e.g. Netflix, Spotify, Prime) and say you spend $22.50 on services per month.
According to Statscan data from 2019 (i.e. pre-pandemic), a household spends $2,775 per year dining out at restaurants, or $231.25 per month (or $57.81 per person).
Finally, from that same 2019 report, the average household spends $1,785 on alcoholic beverages and cannabis per year. Since it’s likely not a “family of four with young kids” sharing this category, let’s split it two and call it about $148.75 per month or $75 per person.
Based on this chart, KOHO’s premium Extra card pays for itself within 5 months of owning it. However, we forgot a crucial figure.
According to MoneySense, the Canadian average monthly credit card spend is $2,447.
So, if we subtract our total $875.90 from the 2% cash back categories, there’s an additional $1,571.10 of spend for which KOHO gives you 0.5% cash back which equates to $78.56.
In other words, the KOHO Premium card pays for itself in its first month (which is a free 30-day trial). From then on, you’re earning nearly $100 per month.
You’ll also earn 2% on your balance, and additional cash back at selected merchants, and you can use the RoundUps feature which helps you save as you spend.
CTA: Start earning cash back on all your purchases, monitor your spending in-app, and earn extra with our partners.Button: Get the KOHO Extra card
What you need to know about downgrading from an annual fee credit card
If you paid for an annual fee credit card, and you’re up for renewal, you can try to get your credit card's annual fee waived.
Your lifestyle—career, mortgage, kids, desires—will change. Your card may no longer suit you, either you need more premium features (and have the cash to pay for a high-end card) or you can no longer afford the annual fee due to a variety of factors.
The hard part here is that at renewal time, you may have earned points you want to carry forward into the next year that will require you to pay the annual fee.
But, you have options.
Credit card companies want to keep you in their system
First, before you decline your renewal fee, know that some credit card providers have incentives to keep customers, including waiving annual fees. If not, you may downgrade to a lower-cost, fewer-benefits card, while still maintaining your earned points until you’re back on your feet.
The credit score pain if you cancel
Cancelling a credit card can hurt your credit score.
It reduces your available credit and increases your credit utilization ratio, which negatively affects your credit and can affect other rates like a mortgage or car insurance.
Applying for a new credit card can also affect your score.
Instead, you can downgrade to a no-fee version, often without repercussion and keep the points you earned throughout the year.
Is paying an annual fee for a credit card worth it?
Whether paying an annual fee for a credit card is worth it or not depends on several factors, including your spending habits, credit score, and rewards and benefits.
While paying annual fees can offer sweet rewards, perks, and bonuses, know that these annual fees also come with higher interest rates and a potential risk to overspend.
If you’re ready to pay for a credit card with an annual fee, shop for credit cards that fit your lifestyle and offer the most value for your money based on your spending level.
Alternatively, if you want to avoid paying annual fees, look for no-fee cards. If you desperately want some perks, but no annual fee, consider using your rewards to cover the cost of the fees.
It’s critical to weigh the pros and cons and explore all options before deciding whether to pay an annual fee for a credit card.
Frequently Asked Questions
Is it worth paying a credit card annual fee?
It depends on your credit score, spending patterns, and incentive options. Although paying an annual charge gives you benefits, bonuses, and insurance, it also carries high-interest rates and costs. Choose a card that best fits your lifestyle and provides the best value for your money after carefully weighing your options.
Can I negotiate credit card annual fees?
Yes, you can negotiate credit card annual fees with your credit card company. Contact their customer service and ask if they can waive the annual fee or something to keep you as a customer. Be polite, explain your situation, and highlight your loyalty and excellent payment history to increase your chances of success.
How can I avoid paying credit card annual fees?
You can avoid paying credit card annual fees by switching to a no-fee card, negotiating with your credit card company to waive the fee, or using rewards to offset the fee. You can also downgrade or cancel your card account if the annual fee is not worth the benefits you receive.
What are the best credit cards with annual fees in Canada?
The best credit cards with annual fees in Canada depend on your spending habits and goals. Top-tier rewards cards include the American Express Platinum Card and the Scotiabank Passport Visa Infinite Card. The BMO World Elite Mastercard and the TD Aeroplan Visa Infinite Card are popular for travel rewards. The KOHO Extra card is a good option for cash back rewards at only $84 per year.
What factors should I consider before paying a credit card annual fee?
Consider your purchasing patterns, credit score, perks and features, interest rates, APR, and whether the card matches your desires before paying an annual fee for a credit card. Do the math—are the rewards and bonuses worth more than the annual fee? Is it within your budget?
If you will use your credit card enough to earn a substantial amount of benefits, points, or cash back, paying an annual fee can be worth it. If you won't use your credit card that much, or the perks it offers are of little use to you, it's better to go with a different card.What are three pros and cons to having a credit card explain? ›
Credit cards offer convenience, consumer protections and in some cases rewards or special financing. But they may also tempt you to overspend, charge variable interest rates that are typically higher than you'd pay with a loan, and often have late fees or penalty interest rates.How do I know if my credit card fees are worth it? ›
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.What are the advantages pros and disadvantages cons of owning a credit card? ›
Credit cards offer benefits such as cash back rewards and fraud protection. But if mismanaged, credit cards can lead to debt, interest charges and damage to your credit.Why would someone prefer a card with an annual fee? ›
In many cases, paying an annual fee can be worth it if your ultimate goal is to maximize your cash back, earn travel rewards or earn a valuable sign-up bonus. It might also be worthwhile if you're new to credit or need to rebuild credit.Should I cancel a credit card with an annual fee? ›
If your card has an annual fee, there's generally no reason to cancel early. Instead, wait until the annual fee posts to your card's account or just before. Most banks and credit card companies have a grace period of at least 30 days where you can cancel the card and still get the annual fee refunded.What are 2 pros and 2 cons of having a credit card? ›
- Pro: Build credit. Credit cards are some of the best tools to build credit over time. ...
- Pro: Added security. ...
- Pro: Benefits and rewards. ...
- Con: High interest rates and fees. ...
- Con: Potential credit card debt. ...
- Con: Potential to hurt your credit score.
- Earning rewards. Earning rewards can be a great advantage of having a credit card. ...
- Help building credit. A good credit score can help you get better interest rates for things like car loans, personal loans and mortgages. ...
- Digital tools and account management. ...
- Unauthorized charges protection.
- Call your issuer. ...
- See if your issuer will waive the fee in exchange for card usage. ...
- Ask your issuer to match another offer. ...
- Ask to cancel. ...
- Use military benefits. ...
- Switch to a different card. ...
- Earn rewards to offset the fee. ...
- Apply for a card that doesn't charge a fee.
Learn more about different types of fees. Credit card processing fees are paid by the vendor, not by the consumer. Businesses can pay credit card processing fees to the buyer's credit card issuer, to their credit card network and to the payment processor company.
It's commonly said that you should aim to use less than 30% of your available credit, and that's a good rule to follow.What are at least 3 disadvantages of using a credit card? ›
- High-Interest Rates. If you carry a balance on your card, the interest rate can be as high as 30% or more. ...
- Potential for Overspending. It's easy to get caught up in the moment when using a credit card instead of cash or a debit card. ...
- High Annual Fees. ...
- Hidden Costs. ...
- Credit Card Debt.
Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these characteristics, and then decide whether or not to approve or deny the loan request.Why is no annual fee important in a credit card? ›
Key points about: credit cards with no annual fee
A card with no annual fee lets you avoid paying a fee each year just to keep the account open. Credit cards with an annual fee help card providers subsidize the cost of rewards and perks they offer their customers.
Credit cards with no annual fee offer the flexibility of credit without the cost of a yearly fee. No annual fee credit cards help reduce your cost of credit while offering you a variety of features such as rewards, cash back on every purchase or lower interest rates.Is it better to cancel a credit card or keep it and not use it? ›
Credit experts advise against closing credit cards, even when you're not using them, for good reason. “Canceling a credit card has the potential to reduce your score, not increase it,” says Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report.Is it better to close a credit card or leave it open with a zero balance? ›
In general, it's better to leave your credit cards open with a zero balance instead of canceling them. This is true even if they aren't being used as open credit cards allow you to maintain a lower overall credit utilization ratio and will allow your credit history to stay on your report for longer.Is it better to have a credit card and not use it or cancel it? ›
The longer you've had credit accounts open, the better it is for your credit score, as it demonstrates a history of responsible credit use. Canceling a credit card can also impact the mix of credit types you have, which represents about 10% of your FICO score.What are 2 dangers to avoid when using a credit card? ›
- Getting into credit card debt. If you have the wrong attitude about credit cards, it could be easy to borrow more than you can afford to pay back. ...
- Missing your credit card payments. ...
- Carrying a balance and incurring heavy interest charges. ...
- Applying for too many new credit cards at once. ...
- Using too much of your credit limit.
If your goal is to get or maintain a good credit score, two to three credit card accounts, in addition to other types of credit, are generally recommended. This combination may help you improve your credit mix. Lenders and creditors like to see a wide variety of credit types on your credit report.
- The Temptation to Overspend.
- Interest Makes It Harder to Pay Off the Balance.
- Risk of Getting Into Debt.
- Risk of Ruining Your Credit Score.
- Minimum Payments Create False Security.
- Confusing Credit Card Terms.
- It's Hard To Track Spending.
- Credit Cards Come With a Risk of Fraud.
- They Prevent Debt, but Funds Run Out.
- They Have No Annual Fees but Incur Other Fees.
- They're Good for Small Purchases, but They Complicate Big Ones.
- They're Easy to Get but Require a PIN.
- They Are Less Risky, But Losses Occur.
- They Can Build Credit or Hurt It.
- Easy access to credit. The biggest advantage of a credit card is its easy access to credit. ...
- Building a line of credit. Credit cards offer you the chance to build up a line of credit. ...
- EMI facility. ...
- Incentives and offers. ...
- Flexible credit. ...
- Record of expenses. ...
- Purchase protection. ...
- Minimum due trap.
- Higher credit limits. ...
- Potentially lower interest rates. ...
- More purchasing and negotiating power.
Credit cards are safer to carry than cash and offer stronger fraud protections than debit. You can earn significant rewards without changing your spending habits. It's easier to track your spending. Responsible credit card use is one of the easiest and fastest ways to build credit.What are 3 benefits of using a credit card for purchases? ›
Summary. You probably know it's quick and easy to use your credit card. But you might not know the other benefits you're getting, including rewards, perks, fraud protection, credit building and more. Read on to learn more about the key advantages of using credit cards.Are annual fees negotiable? ›
Yes, it's often possible to negotiate a credit card annual fee.Can you remove annual fee? ›
Contact your card issuer
The number can usually be found on the back of your card or on your monthly statement. Politely explain that you would like to have your annual fee waived. Explain your history as a reliable customer and emphasize that you would like to remain one. In the best case, they might simply say yes.
The annual fee will automatically show up on your credit card statement once per year as a lump sum charge. You're typically charged during the same month that you sign up for the card and then every 12 months after that. You'll pay the annual fee the same way you'd pay for regular purchases shown on your statement.What is the purpose of credit card fees? ›
The annual fee for these cards helps reduce the financial risk for the issuer. If you're trying to rebuild your credit and boost your score, then it's usually worth a small annual fee.
Interchange. Every time you use a credit card, the merchant pays a processing fee equal to a percentage of the transaction. The portion of that fee sent to the issuer via the payment network is called “interchange,” and is usually about 1% to 3% of the transaction.Are credit card fees tax deductible? ›
Fees related to personal credit cards are not tax deductible. If you use a card for business purposes, you can deduct fees on those cards that the IRS deems "ordinary" and "necessary" for tax purposes.How much of a $1,000 credit limit should I use? ›
A good guideline is the 30% rule: Use no more than 30% of your credit limit to keep your debt-to-credit ratio strong. Staying under 10% is even better. In a real-life budget, the 30% rule works like this: If you have a card with a $1,000 credit limit, it's best not to have more than a $300 balance at any time.How much of a $500 credit limit should I use? ›
Lenders generally prefer that you use less than 30 percent of your credit limit. It's always a good idea to keep your credit card balance as low as possible in relation to your credit limit.How much of my $300 credit limit should I use? ›
You should try to spend $90 or less on a credit card with a $300 limit, then pay the bill in full by the due date. The rule of thumb is to keep your credit utilization ratio below 30%, and credit utilization is calculated by dividing your statement balance by your credit limit and multiplying by 100.When should you not use a credit card? ›
- When you haven't paid off the balance. ...
- When you don't know your available credit. ...
- When you're just doing it for the rewards (but you haven't done the math) ...
- When you're afraid you have no other choice. ...
- When you're in a heightened emotional state. ...
- When you're suspicious of fraud.
Credit cards often offer better fraud protection
With a credit card, you're typically responsible for up to $50 of unauthorized transactions or $0 if you report the loss before the credit card is used. You could be liable for much more for unauthorized transactions on your debit card.
The most important principle for using credit cards is to always pay your bill on time and in full. Following this simple rule can help you avoid interest charges, late fees and poor credit scores. By paying your bill in full, you'll avoid interest and build toward a high credit score.What are the dangers and benefits of credit cards? ›
|Rank||Top 10 Credit Card Pros||Top 10 Credit Card Cons|
|1||Credit Building||Overspending and Debt|
|4||Pay Over Time||Fine Print|
Credit cards can help you improve your credit score, but only if you use them responsibly. Your payment history and borrowing amount are the two biggest factors in your credit score. Secured credit cards are an option for borrowers with a poor credit history.
Common causes of a bad credit rating include failing to stick to your credit agreement, paying the bare minimum on your credit card each month, and falling victim to identity theft.What kind of credit card can you get with bad credit or no credit score? ›
We believe the best credit cards for bad credit are secured cards. With these cards, you provide a security deposit, which protects the issuer in case you don't pay. (When you close or upgrade the account, you can get your deposit back.)What is a normal annual fee for a credit card? ›
The average credit card annual fee is about $21.65, but many cards have no annual fee. A credit card's annual fee typically is charged on the account anniversary or the month after it. It will show up on the credit card statement like a normal purchase. An annual fee on a credit card isn't necessarily a bad thing.How can you avoid paying high annual fees on your credit card bill? ›
- Checking your credit card balance online instead of receiving a paper statement.
- Making your credit card payment on time each month. ...
- Using credit cards that do not charge an annual fee or application fee.
- Not taking cash advances from your credit card.
Is credit card interest tax-deductible? Here's the good news — annual fees and some other credit card fees, on business credit cards are tax deductible, according to guidelines from IRS Publication 535. In order for an expense to be deductible, it must be “both ordinary and necessary,” the IRS specifies.How to cancel a credit card with an annual fee without affecting credit score? ›
A credit card can be canceled without harming your credit score. To avoid damage to your credit score, paying down credit card balances first (not just the one you're canceling) is key. Closing a charge card won't affect your credit history (history is a factor in your overall credit score).What happens if you don t activate your credit card annual fee? ›
If you do not activate your card, your credit card will be closed by your issuer and you cannot use it for any kind of transactions. Therefore, even if your card comes with an annual fee, you do not have to pay it as your account will be closed.Is it possible to avoid credit card fees? ›
For most credit cards, if you pay your balance on time and in full each billing cycle, you can avoid paying interest charges on new purchases. Keep in mind that if you carried a balance from one billing cycle to the next, you may still owe interest even if you then pay the new balance in full.How do credit card annual fees work? ›
The annual fee will automatically show up on your credit card statement once per year as a lump sum charge. You're typically charged during the same month that you sign up for the card and then every 12 months after that. You'll pay the annual fee the same way you'd pay for regular purchases shown on your statement.What are the hidden charges in credit card? ›
Hidden fees come in the form of annual fees, late payment fees, interest charges, and more. Every credit card comes with hidden fees in the form of annual fees, late payment fees, interest charges, that will only cost you more in the long run if you trigger them.
Annual fees: Be aware of having multiple cards that charge annual fees. Paying these fees may mean that the cons outweigh the pros that may come with the card, like rewards or points. Harder to stay organized: The more cards you have, the easier it can be to forget to pay a bill on time or keep track of credit limits.