This is a guest post from Mr. Credit Card, who reviews credit cards and provides updates and opinions on the latest credit card and financial developments. Follow him on Twitter.
There are few things that really stir up the personal finance world more than the topic of being cheap. In my area of expertise, whether paying fees for a credit card make sense or not is hotly contested. Today, I’m going to explore this issue and suggest that paying fees for credit cards may not be such a bad thing.
But first a brief history of credit cards.
In the early days of Diners Club and American Express, there wasn’t such a thing as credit cards! There were only charge cards, which required (and still requires) an annual fee.
Plus, you also had to pay in full. Only folks with good credit and income were able to get one of those Diners Club or Amex cards.
Since the deregulation of the financial industry in the ’80s, the credit card industry has boomed. It also boomed because banks decided to market their credit cards and be more of a processing company.
This deregulation resulted in lots of banks offering credit cards with no annual fee and actually giving consumers a “line of credit,” allowing them to carry a balance. As competition grew, these no annual fee credit cards began to offer rewards like cash back. For folks who pay their bills in full, the concept of paying for an annual fee seems ridiculous. But I would like to propose that paying annual fees for credit cards can be justified in certain cases.
Airline Rewards Credit Cards
To encourage loyalty, airlines have frequent flier programs and they often also have their own credit cards (user are presumably frequent flier members themselves).
These cards normally charge an annual fee that can range from $45 to $150 or more. The perks that come with these airline credit cards include the ability to earn double miles when you buy an airline ticket with the card, annual miles bonuses and annual companion tickets. Frequently, there is a big sign up bonus as well which makes the card worth getting despite the annual fee.
For folks who are not frequent fliers, the concept of paying this annual fee seems silly. But frequent fliers know that earning points just from credit card spending is simply a great way to get free airline tickets.
Secured Credit Cards
Secured credit cards are different from regular cards in that you have to put a deposit down with the credit card issuer (which usually earns interest).
Your credit limit is normally the deposit that you put up. Secured credit cards also charge annual fees, but there are good reasons to get one.
The primary reason for getting secured credit cards is that if you do not have a credit history, you will never be approved for a regular credit card. Secured credit cards allow someone with no credit history to build credit easily. It also gives new immigrants a chance to establish a credit history in this country. In addition, for folks who have just gotten out of bankruptcy, it gives them a chance to reestablish their credit history and scores.
Other than these two broad examples, I agree with the notion that for most people, getting a credit card with no annual fee makes the most sense. If you are not a frequent flier, then getting a basic cash back credit card with no annual fee but still gives cash rebates makes a lot of sense.
But even if we were forced to, annual fees may not be such a bad thing
Here is the thing. Even if we all returned to the good old days of charge cards, I am not too sure that is such a bad thing.
For one, we would not have issued credit to folks who should never have been issued credit. We might have to pay annual fees, but at least we’ll get rewards and if we are forced to pay in full, that is actually a good thing.
When you are searching for a credit card, do not dismiss cards if they charge any annual fee. Instead, ask yourself the following:
- How much you spend on your card?
- Do you pay in full every month?
- Will earning reward points or cash rebates make sense for you
You might be surprised to find that a credit card with an annual fee may be a better fit for you. This would be equivalent to you choosing a savings account with a lower interest rate, but with better features that would work better for you.