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Is an annual-fee credit card right for you?

Jeanine Skowronski

Consumers' aversion to paying for checking products isn't turning major issuers off of annual-fee credit cards. If anything, more credit card companies are getting into the annual fee game.

"There is a trend toward more fee-based cards, much more so than there has been in the past," says Eric Lindeen, director of marketing at Zoot Enterprises, which provides credit solutions to large financial institutions. "Issuers are looking for more ways to drive revenue from their products."

Why issuers charge a fee

Annual fees are typically associated with rewards credit cards. (They're also common among secured credit cards, where those with poor or thin credit pay from around $29 to $44 for the point of entry.)

Annual rewards card fees tend to fall in the $39 to $175 range, though a few elite travel rewards cards do feature fees that are much higher.

These fees help subsidize miles and points, but according to Lindeen, they're also an attempt to get you to use the card more frequently. Here, basic human psychology comes into play: Customers are more liable to say, "Well, since I've paid for the card, I have to use it," he says. "You value something that costs money more than something that doesn't."

The more a customer uses a particular card, the more its issuer can capitalize on credit cards' two main revenue streams: the interest cardholders pay on purchases and the interchange fees merchants pay to accept the payment method.

Online purchase with credit card copyright Ingvald Kaldhussater/Shutterstock.com

This quest for wallet share is "great for consumers," Lindeen says, because it has forced issuers to look for ways to add real value to their rewards programs.

Are the fees worth it?

Not all annual-fee rewards cards, however, are created equal. Some products are "all sizzle, no steak," says John Ulzheimer, president of consumer education at CreditSesame. Other cards are only worthwhile for those with certain lifestyles or spending habits.

Ulzheimer, for instance, happily pays the $450 fee associated with his travel credit card because he utilizes its unlimited airport lounge access, free companion certificate and frequent first-class upgrades.

"If you travel to any extent for business or personally, then (the fee) is beyond well worth it," he says. If you don't, the fee is just a waste.

Ultimately, "the onus is on the consumer" to figure out if a particular product is worth pursuing, says Howard Dvorkin, chairman of Debt.com. He suggests asking, "Why am I paying a fee, and what am I getting for paying a fee?"

Here are some other steps to take when assessing whether to add an annual-fee rewards credit card to your wallet:

  • Conduct a cost-benefit analysis. "For the people who charge their expenses and pay their credit card bill in full each month, the fee is probably worth it," says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. Customers who do carry a balance, on the other hand, will need to do some math to figure out if they're benefiting from the card more than their issuer is. (Keep in mind, rewards cards generally have higher annual percentage rates associated with them.)
  • Look beyond the APR. You should also check to make sure the card doesn't carry high balance transfer, cash advance, over-the-credit limit or late payment fees, says Paul Golden, spokesman for the National Endowment for Financial Education. These fees can eat away at the return on your investment.
  • Scour the rewards program's terms and conditions. "Know the limitations of the rewards," Golden says. Some cards feature earning caps or expiration dates on points and miles. Others restrict where rewards can be redeemed. For instance, Golden says, "Are you getting airline miles at an airline that doesn't even have a hub where you live?"
  • Be honest about your spending habits. The last thing you want to do is purchase goods and services just to earn more points or miles. "If you're chasing rewards by spending more (than you normally would), you're not getting the rewards," Ulzheimer says.
  • Check your wallet. Most customers who, for instance, already own a 3 percent cash back gas card don't drive enough to necessitate a second one. "The average consumer has about four cards in their wallet," Dvorkin says. "It's probably not smart to have four rewards programs."
  • Assess whether an annual fee-free card will suffice. There are rewards cards out there that don't have an annual fee. These cards feature the opportunity to earn rewards on purchases but don't typically include bells and whistles such as 24/7 concierge service. According to Lindeen, though fee-based cards are getting more popular, issuers aren't looking to eliminate cards with no annual fee from their offerings. "If annual fees are so offensive to you, there are plenty of other options," Ulzheimer says.

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