Are Credit-Card Annual Fees Reason to Walk?

SmartMoney

The American frustration with annual credit-card fees is strong enough that it could be keeping some cardholders from making the most economical choice of plastic.

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In a recent survey conducted by the Auriemma Consulting Group, consumers rated annual fees as the type "that would bother [them] the most to pay."

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Forty-three percent of respondents said an annual fee would be the most important factor in looking for a new credit card. Given some hypothetical card offers to choose from, the majority of survey respondents chose cards without annual fees, even though the fee-based alternatives offered richer rewards.

Right now, only about 20% of credit cards carry an annual fee, so it's easy for consumers to avoid paying them, says Bill Hardekopf, the chief executive of LowCards.com, a credit-card comparison web site. But the combined pressures of the recession and new credit-card regulations that tamped down on other fees could cause more card issuers to begin charging an annual toll.

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The card industry says it may have little choice. "One of our concerns with the CARD Act is that it eliminates or greatly reduces the ability of the banking industry to price for risk," says Scott Talbott, chief lobbyist for the Financial Services Roundtable, a trade group. He adds, "A change in annual fees is one of the possible outcomes."

Some banks are now experimenting by imposing new annual fees on existing risky or unprofitable customers, says Ben Woolsey, a spokesman for CreditCards.com. Banks are also putting more marketing muscle behind rewards cards that charge annual fees, so consumers with good credit are likely seeing more offers for them in the mail than they used to, Woolsey says.

Some issuers discount the idea that an annual fee is a turn-off for most consumers. "Our research of prospects and customers shows that they don't mind paying an annual fee if they feel they are receiving equal or greater value for the benefits they receive," an American Express (NYSE: AXP - News) spokeswoman says. She adds, "Every card has a price, we are upfront about ours."

Still, the survey suggests many consumers have an aversion to annual fees, so adding them to more cards will only be a successful business strategy if all the major issuers do it, the way the major airlines have all added fees for checking bags, says Brad Strothkamp, a principal analyst covering financial services at Forrester Research. Major card issuers are essentially pushing a tiered system where annual fees increase as rewards get richer, Strothkamp says.

One exception could be Discover (NYSE: DFS - News), which maintains several cards without an annual fee and may market itself as a fee-free option just as Southwest Airlines (NYSE: LUV - News) positioned itself as fee-free alternative when its competitors began charging baggage fees, Strothkamp says.

Consumers could be costing themselves money or rewards by automatically rejecting cards that carry annual fees without taking a careful look at the terms and conditions, especially if such fees become more common, Hardekopf says. Consumers who want a card that earns airline miles, for example, will often find a much better value in cards that do charge an annual fee, Woolsey says.

Depending on a consumer's spending habits, a rewards card with a fee might save them more than another card without one. For example, Capital One's (NYSE: COF - News) Venture Rewards card with a $59 annual fee offers two miles for every dollar spent, while the fee-free VentureOne Rewards card earns 1.25 miles per dollar spent. A cardholder spending $5,000 a month would earn 45,000 more miles if they were willing to pay that $59 a year. Other perks can make a difference, too. The American Express Delta SkyMiles card allows cardholders to waive fees for checked baggage, so a family of four could easily recoup the value of the card's $85 annual fee after one trip.

Rewards aside, focusing too intently on avoiding an annual fee can backfire. "Most people who get credit cards start out with the best of intentions and they plan to pay it off in full each month, but obviously that doesn't always happen," says Gerri Detweiler, credit advisor for Credit.com. Consumers who might find themselves carrying a balance even for a short time should look first for the card with the lowest interest rate, she says. Carrying a balance of $2,000 for just one month at 18% interest would cost $30, "so one month's interest could equal your annual fee," she says.

Consumers should also be careful to watch for back-end fees that are less visible than an annual fee, but potentially just as costly, Woolsey says. For example, some banks have been boosting balance transfer fees, he says. The norm used to be 3% of the balance up to a certain ceiling, but many banks are now charging 4% or 5% with no upper limit, he says.

A consumer whose bank imposes a new annual fee should try calling the issuer to see if the fee can be waived, Detweiler says. "Making the phone call is half the battle," she says, "because a lot of people are intimidated about calling their card company and asking for a favor." If the first customer service representative can't help, ask to speak to someone else or call back another day, she says. Customers who make a lot of transactions each month are in a particularly good position to get fees waived, Strothkamp says.

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