My New Year’s resolution is to not pay any annual fees. Okay, that is a lie, but I absolutely dread paying annual fees. Most travel credit cards have annual fees, usually after the second year.
Think of an annual fee like the activation fee cell phone companies charge, or a “doc fee” that car dealerships charge. We would simply call these fees, ERRONEOUS. They do nothing other than help credit card companies recoup some of their losses from giving you points or perks.
So, it is your call if an annual fee is worth paying in order to keep a card. There are a few reasons why it may make sense to fork over the money for the annual fee:
1. This may be your first credit card which means it carries a lot of weight on your credit score. You see, account history is one of the biggest factors in your overall score calculation. If you close your oldest account, it could have a negative effect on your credit score. To avoid this, make sure your first credit card is always a NO ANNUAL fee card. I recommend the Chase Freedom card as a first card so you can keep it for a really long time with no extra fees (plus it has great spending bonuses and a lower credit score needed for approval).
2. Your credit card may have an anniversary bonus that automatically kicks-in. Some credit cards, like the Chase Marriott card, offer an anniversary bonus like a free category 1-4 night each time you pay the annual fee. If the annual fee is $69, it may make sense to keep the card since some category four Marriott properties can run up to $150 or so a night, you could potentially come out ahead. You may also retain status with Marriott hotels by keeping the card open, that gives you perks – like free WiFi – whether you stay with points or cash.
3. You could call your credit card company and ask if they will offer you a retention bonus. How a retention bonus works is the credit card company sets a qualification you must meet in order to receive a ‘points’ bonus. A typical retention offer may look like this: Spend $500 each month for the next three months and you will receive 15,000 points. Those 15k points should be worth at least $150 which would easily negate an annual fee of $89 or so. Not all companies or even customer support agents will offer this, but don’t be afraid to ask.
4. Your credit card may have really great perks that make it make sense to pay the annual fee. If you frequently fly on American Airlines, it would be nice to keep an American Airlines card that gives you priority boarding, free checked bags, 10% reward bonus, and 25% off in-flight purchases. If you fly even twice a year while checking bags, the $89 annual would make sense because it is $25 each way to check a bag (4 x $25 per flight =$100). Not to mention priority boarding is super awesome so you can avoid the crowd of googans.
Let’s look into how annual fees are charged to you. Most travel credit cards waive the annual fee for the first year. They do this to incentivize you to sign up for the card in hopes you will forget about the fee come the second year or that you fall in love with the perks. [or both]
Annual fees are easy to understand, they are computed every 365 days from the day the account is opened. So if the annual fee of a card is waived the first year, the credit card company will charge you the fee on the 366th day of your account tenure. The nice part is every credit card company is lax when it comes to cancelling your credit card and reimbursing your annual fee shortly after it posts. And since a few people have asked me, it is very easy to call and cancel a credit card. Just call customer support and ask to shut down the account. It takes two minutes and is usually very hassle free. There are no contracts or agreements that lock you into a credit card, you can cancel WHENEVER you want.
Let’s say you have had a card for 12.5 months and the annual fee shows up on your bill. Don’t freak out! Every major credit card company will credit back the annual fee if you cancel the card in a short window of time. Generally, the credit card company will reimburse the fee if you cancel the card within 30 days of the annual fee posting. Some companies will reimburse the fee if you cancel the card within one billing cycle of the fee posting. At the very least, if you wait two or three months to cancel the card after the fee has posted, many credit card companies will prorate the fee. So a $99 annual fee would reimburse $75 back if you close down the card three months after the fee posted.
It may make sense to wait and prorate some of the annual fee if you have a big family vacation coming up and you planned to, for example, check a number of bags and wanted the checked baggage fees waived. Many airline credit cards waive up to four checked bags for you and your traveling companions. If you had to pay $25 for a prorated annual fee by cancelling 3 months after it was due, it would be more than worth it by saving hundreds in checked bag fees. Also, if your credit card reimburses you for incidental charges every calendar year, it may make sense to wait a few months and squeeze in those second calendar year reimbursements before you close out the card. (ie; Amex PRG or Platinum card)
How to be sure on your credit card company’s annual fee policy? Email, call, or chat! Don’t be shy reaching out to them for any questions. I prefer chat since I have it documented and I can get in touch with somebody rather quickly. Another thing, some credit card companies can take away your unused points if you cancel a card within 6 months of opening. To avoid this, wait longer than six months to cancel your card…. or spend your points! Again, check with your credit card company on their policy before closing your account.
Don’t let an annual fee deter you from signing up for a credit card that may offer $500+ in free travel. The name of the game is “coming out ahead”. Sometimes there are little fees along the way, you may have to spend a little money to make money (points) every now and then.