Are you applying for a new credit card? Then you must have noticed that the card has a clause for an annual fee. Should you worry about that? Not necessarily. The annual fee on a credit card refers to the fee that needs to be paid each year for possession of that card, irrespective of whether you are using it. But one may wonder as there are plenty of cards available in the market, why would one choose one card where annual fees need to be paid? Sometimes, a card that charges an annual fee is the best option for you despite the cost involved.
Why do Credit Card Companies charge Annual Fees?
The credit cards that charge annual fees are usually categorized into two groups – credit cards for people who have an inferior credit score and cards that offer certain rewards.
Credit Cards for Poor Credit
Credit cards designed for people who have a bad credit history often charge an annual fee. Credit card issuers believe that if you have a bad credit score, you must account for making late payments, default on the debts, or missing payments. In such cases, the credit card companies are taking a massive risk by extending credit despite your behavior, and they have every right to charge an annual fee for taking that risk. In some cases, though, the credit card issues charge an annual fee simply because they can charge so. People with poor credit have limited options with the credit cards available to them, and most of these cards entail an annual fee and a high-interest rate. A secured credit card is one option that will not have an annual fee even for people with bad credit, but in this case, one needs to have a fixed deposit or some security as collateral for the card.
Rewards Credit Card
Some credit cards charge an annual fee in exchange for the generous rewards that they extend to the customers. In most cases, the value of the rewards far exceeds the amount of annual fees charged. The rewards may include cashback on purchases or points that can be redeemed for hotel stays or gifts. If you use your rewards card smartly, then you can easily offset the annual fee charged on the card. The goal is to find a rewards card that can match your spending behavior and offer rewards that you can use. If you travel a lot, you can get a rewards credit card that will give you travel points. However, if you do not leave your hometown often, getting a travel rewards card won’t make any sense. In that case, you can opt for a card that gives you cash back on various things.
When is the annual fee charged?
When you get a credit card with annual fees, it is essential to know that when fees will be charged to the account. Some of the credit card companies will waive off the annual fees for the first year, but in most cases, the annual fee will be due as soon as you get the card and every year after that on the same date. The annual fees will be automatically added to the bill, so even if you do not purchase after getting the card, you must pay the 1st bill on time.
Depending on what you are looking to get from the card, a credit card with an annual fee might be worth every penny. But before you rush, you must do all your calculations and be sure that the card you are applying for is perfect for you.