Is the Annual Fee on a Credit Card Worth it

Jack Prenter, Founder of Dollarwise

Credit cards are a crucial part of the modern financial world, offering convenience, rewards, and various perks. However, certain fees associated with credit card ownership can impact a person’s financial well-being. 

In this case, we’ll be discussing the annual fee on a credit card. 

Simply put, an annual credit card fee is a recurring charge imposed by credit card issuers for the privilege of using their card services. This fee typically ranges from $0 to several hundred dollars annually, contingent upon the card’s features, rewards, and benefits.

We’ve calculated the average annual fee at $99, by calculating the averages of 27 credit cards available to Canadians.

Here’s a look at our analysis:

Credit CardAnnual Fee
American Express Cobalt Credit Card$156
CIBC Aventura Visa Infinite Card$139 (1st year rebated)
Scotiabank Gold American Express Card$120
CIBC Select Visa Card$29 (1st year rebated)
True Line Gold Mastercard$39
BMO CashBack World Elite Mastercard$120 (1st year waived)
Tangerine World Mastercard$0
MBNA Rewards Platinum Plus Mastercard$0
No Fee Home Trust Secured Visa Card$0
BMO CashBack Mastercard for Students$0
President’s Choice Financial World Elite Mastercard$0
KOHO Prepaid Mastercard$0
MBNA Rewards World Elite Mastercard$120
TD Aeroplan Visa Infinite $139
Scotiabank Momentum Visa Infinite Card$120 (1st year waived)
Scotiabank Platinum American Express Card$399
RBC ION+ Visa Credit Card$48
American Express Aeroplan Reserve Card$599
American Express Business Edge Card$99
CIBC Aventura Gold Visa Card$139 (1st year waived)
Simplii Financial Cash Back Visa Card$0
HSBC +Rewards Mastercard$25
CIBC Dividend Visa Infinite Card$120 (1st year waived)
Triangle World Elite Mastercard$0
Marriott Bonvoy American Express Card$120
HSBC World Elite Mastercard$149 (1st year rebated)
Scotiabank Scene+ Visa Card$0

Based on our research, it’s evident that there are some drastic differences in annual fees between the various credit cards. 

The overall range of the credit cards we researched goes from $0 in annual fees to $599 (American Express Aeroplan Reserve Card). Therefore, you always have to look at every aspect of the credit card to determine whether or not it’s worth it for you (more on this later). 

Why do credit cards charge annual fees?

Credit card issuers levy annual fees to cover the costs of providing a spectrum of perks and benefits. These charges offset the expenses linked to rewards programs, travel incentives, insurance coverage, and concierge services, among others. 

It’s a trade-off: in return for the annual fee, credit card companies offer a suite of features designed to appeal to different lifestyles and spending habits. 

This enables card providers to maintain profitability while extending an array of value-added services to their clients.

When is an annual fee on a credit card is worth it?

Better cash back rewards

Comparing cash-back rewards between credit cards with and without annual fees often serves as a way for users to assess if paying the fees is worth it. 

Let’s consider two hypothetical scenarios: Card A, with no annual fee, offers a 1.5% cash-back reward on all purchases, while Card B, with an annual fee of $120, provides a 2% cash-back reward on similar purchases.

At first glance, the no-fee Card A might seem appealing, but if we dive deeper into spending habits, it might not look so good after all. 

For instance, if a user spends $15,000 annually, Card A would provide $225 in cash-back rewards, while Card B, even after deducting the $120 fee, would yield $180 in cash-back rewards.

However, the true evaluation lies in understanding individual spending habits

Consider this: a customer spending predominantly on specific categories – say, groceries or gas – might find that Card B offers higher cash-back rewards on those specific expenditures, potentially outweighing the fee.

Let’s take a closer look at an example case study: Maria spends $2,000 a month, primarily on dining and travel, totaling $24,000 annually. With Card A, she earns $360 in cash back.

However, with Card B’s higher rewards, even after deducting the $120 annual fee, she receives $480 in cash back, making the net value gained from Card B $120 greater than Card.

In such scenarios, the annual fee becomes irrelevant when the net gain from the higher-reward, higher-fee card surpasses the benefits from the no-fee card. This is why you should always compare and analyze cards using specific examples. 

Perks: Airlines, hotels and status

Credit cards with annual fees often come with a wide range of perks and features that are often related to travel-related activities. 

Cards affiliated with airlines or hotels cater to frequent flyers or avid travelers. These cards typically offer perks such as free checked bags, priority boarding, complimentary hotel stays, or accelerated loyalty program status. 

For those who regularly fly a particular airline or stay at specific hotel chains, the benefits these cards offer can significantly outweigh their annual fees.

Take for example cards affiliated with Air Canada and by extension, their Aeroplan Loyalty Program. You can earn Aeroplan Points by purchasing Air Canada (or partner airline) flight tickets, buying items from the official Air Canada eStore, renting vehicles, and more. 

These points can then be spent on a wide array of services or products, including paying for flight tickets using points, buying items from the store, etc. 

Beyond airline or hotel-specific cards, general travel cards come with an assortment of travel-related benefits. They cover a spectrum of travel insurance coverages, ranging from trip cancellation and interruption insurance to rental car coverage and emergency medical insurance. 

Moreover, these cards often grant access to priority services at airports, expedited security checks, and complimentary access to airport lounges worldwide.

Credit cards with annual fees sometimes come with additional perks that are unrelated to travel activities. Holders of such cards might receive elite status or preferred access with hotel chains and car rental companies, translating into room upgrades, late check-outs, or discounted rental rates. 

Furthermore, certain credit cards offer exclusive access to events, concerts, or shows, providing cardholders with priority or discounted tickets, such as the AMEX “Front of the Line” program.

In evaluating the worth of an annual fee, consider all aspects of a credit card, not just the cash back options or the annual fee amount, especially for Canadians who frequently travel or seek additional benefits beyond financial returns. 

Sign-up bonuses

When users apply for a new credit card, they often encounter lucrative sign-up bonuses – rewards granted after meeting specified spending amounts within an allotted time frame. These bonuses could appear as cash-back incentives, travel points, or miles.

Consider this scenario: A credit card with a $150 annual fee offers a sign-up bonus of $300 cash back upon spending $3,000 within the first three months. In this case, the sign-up bonus not only compensates for the annual fee but also leaves an additional $150 as a net gain.

While credit cards bearing annual fees offer a spectrum of benefits, they also carry inherent risks and drawbacks that warrant consideration before opting for such cards.

Overspending risks

One of the primary risks associated with annual fee-bearing credit cards is the temptation to overspend. In pursuit of meeting spending thresholds to unlock sign-up bonuses or maximize rewards, cardholders might find themselves spending more than intended. 

This inclination towards excessive spending can lead to financial strain, especially if the rewards gained fail to outweigh the additional expenses. Always keep track of your spending habits to prevent overspending. 

Falling short of expected spending

Another potential drawback arises when users aim to reach specific spending targets to justify the annual fee or maximize rewards. Unforeseen changes in spending habits or unexpected financial constraints might result in falling short of the expected spending amounts. 

Consequently, this could render the rewards gained insufficient to offset the annual fee, negating the expected benefits and leaving the cardholder at a net loss.

Inadvertent accumulation of debt

Annual fee-bearing cards, coupled with attractive rewards, may inadvertently encourage users to carry balances or accumulate debt. 

The allure of rewards might prompt individuals to overlook the higher interest rates associated with these cards, leading to revolving credit card debt that outweighs the benefits gained from rewards or perks.

Evaluating the worth of an annual credit card fee for you

For cash back rewards

Determining whether a cash-back card’s annual fee is worth it involves calculating the break-even point. This point signifies the spending threshold at which the benefits gained from the card offset the annual fee. 

To calculate your break-even point, analyze your spending breakdown across various categories, such as groceries, dining, gas, and other expenses. Match these categories with the card’s reward structure to assess the cash back you’d earn. 

For example, if a card offers 3% cash back on groceries and you spend $500 monthly on groceries, that’s $180 cash back annually. If the annual fee is $100, you’d break even once you hit $3,333 in annual grocery spending.

For travel rewards

Assessing the worth of travel rewards and perks is highly subjective and dependent on how often you travel and where. 

Consider whether the card’s perks align with your travel patterns and if similar benefits could be obtained through alternative means, such as paying for services directly. The value of these perks should surpass the annual fee to justify its worth for frequent travelers.

For sign-up bonuses

Sign-up bonuses present an opportunity to offset or exceed annual fees upfront. To gauge the value of a sign-up bonus against an annual fee, calculate the potential bonus against your typical spending habits.

If a card offers a $500 sign-up bonus for spending $4,000 in three months and the annual fee is $150, this bonus not only covers the fee but leaves an additional $350 in rewards.

Ultimately, the decision to opt for a card with an annual fee hinges on aligning its benefits with your lifestyle and spending patterns. 

Calculating potential rewards, assessing travel habits, and understanding sign-up bonuses is crucial in determining whether the annual fee on a credit card is a worthwhile investment for you.

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