Should You Pay an Annual Fee for a Credit Card?

At first, paying for a credit card can seem counterintuitive, and there are some excellent no-fee options. However, a credit card with an annual fee might offer more rewards and perks. These benefits have the potential to be quite substantial depending on your spending habits and financial situation. In some cases, choosing the right card means your rewards might even surpass the annual fee cost. Read on to learn more about annual fees and how to choose the right card for you. 

What Is an Annual Fee and How Does it Work?

Many credit cards charge cardholders an annual fee for using the card. Most fees range from $39 (mainly for low interest/balance transfer cards) to $150 (cash-back and rewards credit cards). There are even some charge/business cards that can cost you hundreds of dollars per year, but these are not for everyday spending. 

Plenty of credit cards charge the fee as an annual lump sum, while others break up the fee payment over each month of the year. The fee is not based on your spending or balance; it is the same regardless of how you use the card. Some cards may also charge you an additional fee for supplementary cardholders. Often that fee is a smaller amount - around $50 per person. 

Compared to no-fee options, annual fee credit cards often have more rewards – whether it be a better sign-on bonus, accelerated earn rate, or perks such as complimentary airport lounge access. When you do the math on rewards vs. spending, you might come out farther ahead with the for-fee card. 

What Are the Benefits of an Annual Fee Credit Card?

As mentioned previously, an annual fee credit card can give you access to more rewards, perks, bonuses or superior earn rates. It might even help you work on your credit score. 

Better Cash-Back Rewards

Cash-back cards are an excellent example of how paying a fee might be the better choice. Let’s say you have a cash-back card that charges an annual fee of $120 with an earn rate of 4% cash-back on gas and groceries. If you spend $3000 on gas and groceries within your first three months of becoming a cardholder, you will have already made back your annual fee. 

On the other hand, a no-fee cash-back card might give you just 1% cash back in those categories. This means you would have to spend $12,000 before getting $120 in cash-back, which might take you all year. 

Better Travel Miles

Travel credit cards are always popular – they provide a way to earn travel rewards while spending money on everyday purchases. Often you’ll earn travel points as part of a non-transferable proprietary program, such as Aeroplan or Air Miles. These cards entice new cardholders with all sorts of perks. Many for-fee travel cards offer a better earn rate than a no-fee card, along with not-insignificant extras such as free checked baggage. 

For example, let’s say you sign up for a travel rewards credit card without an annual fee that offers an earn rate of two points per dollar and no sign-up bonus. The for-fee card from the same program might offer four points per dollar and a generous one-time bonus. Not only would you earn more points more quickly with the annual fee credit card, but you’d also potentially cover the cost of the card (and then some) with the welcome bonus.  

Remember that these points are typically worth the most when you redeem them for travel, so it’s best to have a specific travel goal in mind or have a solid idea of your future travel plans before signing up for one of these cards.  

Credit Building

When you’re a young person or a newcomer to Canada who is just starting to build credit, or if you have a low credit score that you want to improve, your best option might be a card that carries a fee. 

This is because there are limited options for no- or low-credit potential cardholders. Most of these cards carry a small fee of around $40. If you think you can pay off that fee and your monthly balance, then these cards are an excellent way to build credit. Otherwise, you’ll have to go with a secured credit card, which means you’ll have to put money upfront as collateral before you can use the card. 

Special Offers

Aside from the occasional promotion, it's very rare that a no-fee card will come with a welcome bonus or special offer. Sometimes offers can be a limited-time accelerated earn rate for travel points or an increased percentage of cash-back on your purchases awarded as an annual statement credit.

While the value of your travel points can sometimes be hard to pin down, with a bit of research, you can get an approximate idea of the dollar value of your points. For example, if the welcome offer included a seat for your travelling companion on the first flight purchased with your card, you could easily price out what that would cost. The value of that plane ticket is likely much more than the annual fee. From there, you should still do calculations to determine if this card is worth it on an ongoing basis since the welcome offer is only awarded when you sign up.

Is an Annual Fee Credit Card Right For you?

To determine if an annual fee credit card is right for you, you’ll have to consider your spending habits carefully. If you’re already tracking your spending, you can simply look at your purchases and rank them from highest cost to lowest. That should give you an idea of what your top spending categories are. If you aren’t already tracking your purchases, it might be a good idea to pore over the last few months to get a general idea of where most of your money goes.

From there, you can match your top expenses with the earning categories for your top credit cards to determine which type of credit card you should get. For example, your top categories may be groceries, gas and dining out. In that case, a card that earns rewards in those categories might appeal to you. In comparison, a card that rewards frequent travellers would be a good choice for someone who routinely goes on cross-country trips. 

When is it Advantageous for You?

You might want to consider paying an annual fee if you understand your spending habits, are a regular credit card user and have a clear idea of what you want to do with your rewards/points. You’ll have to do a little math to see if you will come out ahead with whatever card you choose, but that little bit of preparation will go a long way towards your bottom line. 

When is it Disadvantageous for You?

Like with every financial product, there’s no one-size-fits-all advice for everyone. There are cases where paying an annual fee is just not worth it. For example, you might be a person who just doesn’t use a credit card that often. Maybe you prefer cash, or you hate having any kind of debt. In any case, without regular use, you might not be able to earn enough points/cash-back to make it worth the fee, or you might not use the rewards the card provides. 

Can You Avoid Paying the Annual Fee?

Yes, there are a few ways to avoid paying the annual fee. First, many cards include a first-year fee-waiver as part of their welcome bonus. They might also waive fees for additional cardholders in the first year too. However, by the time the second year of card membership rolls around, you will have to start paying. 

Another way to avoid the fee is to take advantage of any promotions that your financial institution might offer. Canada’s big five banks (Scotiabank, BMO, CIBC, RBC and TD) might have promotions that waive the fee for the credit card you hold with them if you also open a specific kind of bank account. (Just watch the fees for that bank account; you’ll likely need to maintain a minimum balance to avoid them.)

And finally, you can always just call your credit card company and ask them to waive the fee. This works best if you have a proven history of paying your bills on time and in full, demonstrating that you are a reliable customer. 

The Bottom Line

So, should you pay an annual fee for a credit card? Paying an annual fee for a credit card might give you access to better earn rates, superior cash-back earnings and more perks and benefits. However, you’ll have to crunch the numbers to determine which card suits your particular situation and spending habits. 

If paying any kind of annual fee isn’t something you’re willing to do, there are plenty of other options. However, don’t expect to get a lot of extras and rewards from a no-fee card.