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Should You Pay an Annual Fee for a Credit Card? Answer These Questions to Find Out

The Motley Fool logo The Motley Fool 1/21/2021 Maurie Backman
a man and a woman standing in a room: Should You Pay an Annual Fee for a Credit Card? Answer These Questions to Find Out © Provided by The Motley Fool Should You Pay an Annual Fee for a Credit Card? Answer These Questions to Find Out a man and a woman standing in a room: A hotel employee walking a guest into his upgraded hotel room. © Getty Images A hotel employee walking a guest into his upgraded hotel room.

The great thing about credit cards is they offer benefits you won't get when you make purchases using cash. Some credit cards, for example, offer generous cash back rewards or air miles. Others offer perks like free checked bags when you travel by plane. However, the more robust the reward offering, the more likely you'll be to face an annual fee in exchange.

Credit card annual fees vary depending on the perks involved. Some cards might charge just a $95 annual fee, whereas others might charge $250 or more. To see if a card with an annual fee is right for you, ask yourself these questions.

1. Will my rewards more than make up for the fee?

A $95 annual fee, or even a higher one, isn't so bad if the card in question makes it easier to rack up loads of cash back. Say you're looking at a no-fee credit card that gives you 2% back on groceries and gas, and a card with a $95 annual fee that gives you 3% back. If you normally spend $1,000 a month, or $12,000 a year, in those categories, the card with the fee will give you an extra $120 compared to the no-fee card. As such, you'll come out ahead even if you fork over that $95.

2. Will this card offer perks I can't get elsewhere?

Sometimes, the solid cash back is not the only reason to pay an annual fee. Your card might also entitle you to benefits you can't score otherwise. For example, you may be eligible for upgraded airline seats or hotel rooms if you use your travel rewards credit card to book your trips. And there's certainly value in that.

3. Is there a sign-up bonus that's too good to pass up?

Some credit cards offer generous sign-up bonuses that reward you for racking up a certain amount of purchases within your first few months. While it's possible to snag a sign-up bonus on a card without a fee, you may get a more generous bonus if you're willing to pay one. You might find a credit card with a $95 annual fee that gives you $200 cash back just for making $500 in purchases during your first three months. That's a pretty easy spending threshold, even if you don't have big expenses looming. If you pay that fee, you'll still come out $105 ahead.

Always run the numbers and assess the benefits

It's easy to assume an annual credit card fee won't be worth it. But before you do, run some calculations to see how much you might save in the form of cash back. At the same time, see what benefits the card entitles you to. You may find that while there's no sense in applying for a credit card with a $500 annual fee, a $95 fee is worth the perks.

Another thing to keep in mind is that some annual fee cards waive the charge your first year as a cardholder. That gives you a great opportunity to see if the card in question is worth paying for. If you find that after a year, you didn't spend enough to recoup the fee, you can always cancel the card without losing a dime.

Finally, just because a credit card comes with an annual fee doesn't mean you'll always have to pay it, or pay it in full. It never hurts to ask a credit card issuer to waive an annual fee once you've been a cardholder in good standing for quite some time. You never know what lengths a credit card company might go to in order to retain your business.

The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. SPONSORED:

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As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

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