Does It Ever Make Sense To Ignore Credit Cards With No Annual Fee?
With credit cards no annual fee is not always best. Believe it or not, there might be a time when choosing a credit card that has an annual fee over a credit card that does not have an annual fee might be in your best interests. It’s true. How? Well, it depends upon the perks that come with the card. You need to consider how credit card fees work.
Some Basics
Consider some times when you have to spend money to get money – or at least have the potential to spend money. You might be considering credit cards at two home improvement stores that you frequent. One card offers a zero APR for 12 months on all purchases. The other card offers you 5% off every time you use it. Which is better? Well, it depends on you and your habits. If you are one to pay your card off each month then it’s a no brainer – you want the 5% off card. But if you tend to do big projects and carry the balance for a few months as you pay it off, then the zero APR card is better for you. Is the zero percent APR credit card always best?
What if one of those cards had an annual fee and one was one of the credit cards with no annual fee? Say the 5% off card had a $29 annual fee. Is it worth it? Well, on this card for every $100 you spend you will save $5. So, if you spend $600 in a year you would save $30. That’s enough to cover the annual fee. Thus, this annual fee would be worth it to you if you know you are going to spend $600 or more.
Exploring a Credit Cards no Annual Fee, or Low Fee, Scenario
Let’s look at another scenario.
Card #1 gives you 1% cash back on all purchases. In addition, you get 5% cash back on all gas purchases and restaurant purchases, and a $100 sign up bonus. This card has no annual fee.
Card #2 gives you 4% cash back on all purchases. Comes with no sign up bonus. It has an annual fee of $59, but they wave that fee the first year.
Let’s say that in a year you spend $4,000 at restaurants, $3,000 in gas, and another $5,000 on your card. A total of $12,000 a year.
After one year card #1 would have paid you $150 in gas cash back, $200 in restaurant cash back, $50 in other cash back and a $100 signing bonus. In one year with card #1 you earned $500.
After one year card #2 would have paid you $480 cash back, with no fees.
So, after 1 year card #1 looks great, right?
Now, let’s look at 3 years of usage.
Card #1 stays the same all 3 years, except you no longer get that $100 signing bonus. So, over 3 years Card #1 earns you $1300. Card #2 now kicks in your annual fee, so after 3 years you have earned you $1322.
After 3 years Card #2 is now the better choice, and it continues to be so for the life of the card. So as you see, sometimes an annual fee card is still your best choice over credit cards with no annual fee – you have to look at other factors as well.
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