Are Annual Fees on Credit Cards Worth It? An In-depth Analysis

Credit card annual fees are a contentious point for many. Some believe that you should never pay an annual fee for a credit card, while others are open to the idea of using the benefits of a credit card to justify a potential annual fee.

I’ve paid thousands of dollars in credit card annual fees throughout my life, but at the same time, have extracted tens of thousands of dollars in value from dozens of cards that award travel rewards, cash back and other lifestyle benefits.

However, the important balance to be played with credit cards that have an annual fee is remaining diligent to extract the value from the card you apply for. All too often, consumers apply for these cards and don’t take the time to use the benefits. Even worse, they end up overspending on the card and lock themselves in credit card debt.

So, yes, credit cards with annual fees can be worth it. But it takes the right plan and mindset to intentionally use these cards to their fullest potential, as well as using them responsibly.

Here’s what you need to know about credit cards with annual fees.

Credit card issuers know consumer psychology

The largest credit card issuers, including those like Chase and American Express, know consumer psychology extremely well. And by offering flashy credit card products with rewards and benefits, they know consumers are incentivized and excited to swipe their cards for purchases. And while those benefits are a large expense for issuers, paying for them is quite worth it. Consumers pay $120 billion in credit card interest and fees each year, according to the CFPB.

But it’s not so much the product that is alluring to consumers, but it’s the mindset of many that they are spending money anyways, and the rewards are ‘free’. The truth is somewhere in the middle. It’s well known that people are more likely to spend more when they use a credit card. However, there are plenty of purchases that would remain the same despite how you pay, such as a cell phone or utility bill. So there is context within each person, but if consumers can’t afford to pay their bill, credit card issuers rake in heaps of interest.

How consumers can justify an annual fee

If you’re set on having a credit card and are interested in paying an annual fee, there’s a few questions to ask yourself as you’re researching different cards.

First, what is your current credit score?

If your credit score is less than optimal, it may be a better idea to focus your energy on raising your credit score to an excellent point. In the meantime, it may be a better strategy to use a no annual fee credit card.

You can improve your credit score in several different ways, including paying off existing debt and including your subscriptions you’re paying for to name a few.

Next, will you put yourself in potential financial harm with a credit card?

It’s easy to think that you’re financially responsible and savvy, but this is the point to have an honest conversation with yourself.

If you believe you can use a credit card strategically and within your means, it could be a smart solution for your daily expenses.

What is your goal with the credit card you choose?

There are hundreds of credit cards to choose from, and it’s important to select one that aligns with your financial and lifestyle goals.

For example, if you’re trying to cut back on costs and save money, a cash back credit card could be helpful. Additionally, if the card comes with benefits like cell phone protection, it could be a way to save money on expenses you would normally have.

If you have plans to travel in the near future, a travel credit card could be a great idea. Travel credit cards typically come with the ability to earn travel rewards, as well as travel insurance and rental car coverage. So not only can you earn on your expenses, but the card can also serve as an ancillary tool to accomplish your goals.

Are you able to stay organized enough to ensure that you will be able to extract the value from the card you choose?

The most important part of using a credit card with an annual fee is ensuring you’re actually using the benefits provided.

For example, if you apply for a card that has travel credits, fee credits for airport security program enrollment and discounts for retailers you would otherwise spend at — it’s imperative to keep track of you using the card to its fullest extent. Otherwise, you could be throwing unnecessary money to the credit card company.

The bottom line

Credit cards can be a highly beneficial tool for your daily spending habits. You can earn rewards, have helpful spending credits and be able to help you protect some of your purchases.

However, it must be a carefully used tool to avoid falling into a cycle of credit card debt. Because any credit card, annual fee or not, can be a potentially financial disaster waiting to happen. But with the right strategy and approach, it can not only help you with your purchases, but also help you save money and potentially earn you free travel along the way.