Understanding Credit Card Annual Fees: A Comprehensive Guide

At O1ne Mortgage, we prioritize consumer credit and finance education. This blog aims to provide an objective view to help you make the best decisions regarding credit card annual fees. If you have any mortgage service needs, feel free to call us at 213-732-3074. Let’s dive into the details of credit card annual fees and how they can impact your financial health.

How a Credit Card Annual Fee Works

Credit card annual fees are typically associated with premium rewards cards, travel cards, and secured cards. Some issuers may waive the fee for the first year to attract new cardholders, but generally, you will pay the fee when you first open your account and on each anniversary of your account opening.

The fee is often added to your account’s balance immediately. Even if you don’t use your card for purchases, it’s crucial to pay your bill on time to avoid late payment fees.

When You Should Keep a Credit Card With an Annual Fee

Paying an annual fee might be worth it if you’re earning substantial rewards, enjoying cardholder benefits, or getting other value from the card. Here are some scenarios where keeping a card with an annual fee makes sense:

You Offset the Annual Fee With Rewards

Estimate how much you’ll earn in rewards during a year by reviewing your account history. Compare this to what you could earn with a no-annual-fee rewards card. If the difference exceeds the annual fee, paying the fee might be justified.

You Use the Added Cardholder Benefits

Some credit cards offer various benefits such as airport lounge access, free hotel room certificates, primary rental car coverage, free checked bags, and statement credits. Consider how often you use these perks and whether they’re worth the card’s annual fee.

You’re Using an Intro 0% APR Offer

If you opened a credit card with an annual fee to take advantage of an introductory purchase or balance transfer 0% APR offer, you may need to keep the card open while paying off the balance.

When You Should Cancel a Credit Card With an Annual Fee

If you’re not getting much value from the card anymore, closing it might be a better option. Here are some reasons to consider canceling:

You Don’t Want to Spend Mental Energy on Rewards

Cards with annual fees might offer bigger and better benefits, but they can also require more mental energy to manage. A flat-rate cash back card without an annual fee could be a simpler alternative.

You Don’t Earn a Lot of Rewards

While cards with annual fees may offer high rewards rates, the difference might be minimal compared to no-annual-fee cards.

You Rarely Use the Added Cardholder Benefits

Some credit card benefits sound better than they are, especially when there are restrictions or you end up spending extra money just to take advantage of a “benefit.” If your lifestyle or travel habits have changed, the card’s benefits might not align with your needs anymore.

The Benefits or Reward Program Changed

Credit card benefits and rewards programs occasionally change, including hotel and airline loyalty programs. If these changes reduce the card’s value to you, it might be time to cancel.

If you’re considering closing your card, call the card issuer first to see if there are any retention offers. Sometimes you can get the fee waived, receive a statement credit, or earn additional rewards if you keep your card open.

Consider Downgrading Your Credit Card Instead of Canceling It

Downgrading a credit card involves switching to a card with fewer benefits and possibly lower fees. This can be a good option because:

No Impact on Your Credit Score

Switching cards without closing your account generally won’t affect your credit score.

You Won’t Lose Rewards

If you’re earning rewards in the card issuer’s program, you might be able to downgrade to a different card in the program to keep your rewards. If you can’t downgrade, redeem or transfer your rewards before closing the account to avoid losing them.

Potential Drawbacks

A product change won’t necessarily be a good option if you’re using a promotional APR. The new card might have the same standard APR, but you won’t necessarily get to continue the promotional APR offers. Additionally, product changes aren’t always available, and you might have to choose from a limited number of cards. Call your card issuer to discuss your options.

How Canceling a Credit Card Affects Your Credit

Closing a credit card can immediately affect your credit scores by changing your credit utilization ratio and credit mix, and it may impact the average age of your accounts down the road.

Higher Credit Utilization

When you close a credit card, your available revolving credit decreases, and your utilization ratio may increase, which could hurt your credit scores. If you have other credit cards, you may be able to offset the impact by paying down their balances or using them for fewer purchases.

Fewer Revolving Accounts

Having a mix of open revolving and installment accounts can help your credit scores. If this was your only credit card and you don’t have other revolving credit accounts, closing the card might reduce your credit mix and hurt your scores.

Impact on the Average Age of Accounts

Your credit card account can stay on your credit report for up to 10 years and continue helping your credit scores during this time. When the account eventually falls off your report, the average age of accounts in your credit report may decrease, which could hurt your scores.

Keeping credit cards open is generally better for your credit scores, which is why downgrading or asking for a fee waiver might be a good first step. However, saving money on annual fees may be a priority, and the impact on your credit could be minimal if you have other credit cards with low balances or plan on opening a new credit card soon.

Compare New Credit Card Offers

Check your credit report and credit score for free to see where you stand, and monitor your credit score if you decide to close your card. If downgrading your card makes sense, your credit score won’t affect your options. However, if you decide to close your card and open a new one, you can use various card comparison tools to find and compare credit card offers based on your unique credit profile.

At O1ne Mortgage, we are here to assist you with all your mortgage service needs. Call us at 213-732-3074 for expert advice and personalized service. We look forward to helping you make the best financial decisions.