Getting a Card With an Annual Fee? Here’s What You Need to Know

Rebuilding your credit requires good financial behavior. You’ll want to make sure you’re paying bills on time and, once you do that, building a great credit score is a dance between using credit and keeping debt at bay. To that end, is it ever worth it to pay an annual fee for a credit card?

It can be, but only under some circumstances.

If I Have Bad Credit Will I Pay an Annual Fee?

If you are starting from the bottom of the credit ladder, your only credit card options may be secured cards. (Not sure where your credit stands? You can take a look at two of your scores for free, updated every 14 days, on Credit.com.) Secured cards require holders put down a cash deposit that serves as their credit limit. These cards are generally meant for people who can’t secure credit otherwise, whether because they have a poor or thin credit profile. But these cards do have the potential to be upgraded to unsecured cards after a cardholder demonstrates responsible use for a given period of time.

Many secured cards are available for no annual fee. Having bad credit doesn’t mean you have to pay for the privilege of carrying a credit card.

Do I Have to Pay an Annual Fee to Get Points or Miles?

Many rewards credit cards charge annual fees, but quite a few are available without these fees. If you pay your full balance every month, you can essentially earn money using those cards, whether in the form of travel benefits or cash back. If you aren’t in the habit of paying your card balance in full each month, paying interest might wipe out the rewards you earn.

Do I Have to Pay an Annual Fee for Other Credit Card Benefits?

Many cards with no annual fee include valuable benefits. The Citi Secured credit card, for example, offers travel accident insurance, trip cancellation and interruption protection, car rental insurance, extended warranty, damage and theft purchase protection and roadside assistance dispatch service, all for free. Many major credit card issuers offer similar benefits as a standard. (Full Disclosure: Citibank advertises on Credit.com, but that results in no preferential editorial treatment.)

However, if you want premium benefits, like free checked bags or a free hotel room every year, you’ll probably pay an annual fee.

Is an Annual Fee Worth It?

Simple math can help determine whether the benefits outweigh the cost of owning a credit card that charges an annual fee.

For example, if you and your partner expect to take one trip together each year on United Airlines, you might save money by paying for the United MileagePlus Explorer credit card. The card costs $95 a year to own. United charges $25 for the first checked bag for each passenger, but if you purchase your tickets with the United MileagePlus Explorer credit card, you and one traveling companion can each take one checked bag for free each way. Two people traveling round-trip together just once will save $5. Those savings come in addition to the card’s other benefits, including the opportunity to earn miles in United’s frequent flyer program.

Southwest Airlines also has a rewards credit card. The Southwest Rapid Rewards Premier credit card costs $99 a year. Southwest offers two free checked bags flyers. The cash advantage to this card is the 6,000 bonus points you earn each year after you pay your annual fee. That number of points would cover a Wanna Get Away fare under $99. By paying the annual fee, you’re essentially pre-paying for $99 worth of travel. So if you redeem the points for a Southwest ticket, you get the card’s other benefits for free.

What About Big Annual Fees?

The internet was abuzz when Chase launched the Sapphire Reserve card with an annual price tag of $450. Other cards are similarly expensive, like the United MileagePlus Club card ($450) and the Platinum Card from American Express ($550).

What do you get for that cash? The Chase Sapphire Reserve card (read our review here) offers $300 in automatic travel credits. American Express offers a $200 credit toward airline fees like in-flight meals. United Club cardholders get a $100 statement credit after their first purchase.

The Sapphire Reserve and Platinum Card also offer credits toward Global Entry or TSA PreCheck application fees, but these come around only once every few years. It’s important you read the terms and conditions carefully so you know what these regulations entail.

Other top-tier benefits include more points earned per dollar spent, more value per point redeemed, more free checked bags, private lounge access, complimentary in-flight or in-airport Wi-Fi, complimentary breakfasts at certain hotels, hotel and car rental upgrades, high status in hotel loyalty programs and so on.

Are these benefits worth the cost? Only if you use them. Free checked bags are worthless if you don’t fly. Free Wi-Fi doesn’t mean much unless you were already planning to buy Wi-Fi. The same goes for free lounge access or car or hotel room upgrades.

The Most Expensive Credit Card

The most expensive credit card is the one you don’t pay off. If you carry a balance, you will generally pay more in interest than you earn in rewards. You may still come out ahead if you carry a balance just one or two months out of the year, but this scenario is rare.

If you are working to pay down debt, consider sticking with cards that have no annual fee. If you find a credit card that you think will save you money in the long run despite having an annual fee, track your use of the card and its benefits to be sure you’re getting your money’s worth.

Image: Geber86

At publishing time, the Citi Secured MasterCard and Platinum Card from American Express are offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of Credit.com alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).

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How to Use Your Wanderlust to Build Credit

Love to travel? Good news: There are ways to put that wanderlust to use with a travel rewards credit card.

Though travel rewards cards aren’t the easiest to get approved for as they require an excellent or good credit score, those who are able to snag one can use it to build better credit. (Just, remember, before you apply, it’s important to know where you stand so you don’t get turned down and have your score suffer as a result of the inquiry.)

Travel Rewards Cards & Credit

A travel rewards credit card lets accountholders earn points or miles that can be put towards hotel stays, airfare and other travel expenses. These rewards can help world travelers lower the cost of their vacations, but the card itself could be a good instrument for building credit.

If you make all of your payments on time, eventually your score will begin to rise because this behavior creates a positive payment history, the most important factor among credit scoring models. The card’s credit limit will also be counted towards your credit utilization rate, another major factor among credit scores. Your credit utilization rate is essentially how much debt you are carrying versus your total available credit. For best credit scoring results, it’s generally recommended to keep the amount of debt you owe below ideally 10% and at least 30% of your credit limit(s). So, if you charge your vacation and then pay most or, even better, all of those purchases off right away, your score could benefit.

While using your card, you can keep track of how your usage and payments are affecting your credit by signing up for Credit.com’s free credit report summary. Beyond seeing your credit scores, you’ll be able to check how you’re doing in five key areas of your credit report that determine your credit score, including payment history, debt usage, inquiries, credit age and account mix.

Since interest rates for travel rewards cards tend to vary depending on creditworthiness, you’ll want to be mindful about carrying a balance. Doing so could hamper your credit goals, and the interest you pay could exceed whatever you’ve managed to glean from rewards. Many travel rewards cards carry annual fees, too, so you’ll want to make sure your spending habits justify that potential cost. (You can read about the best travel credit cards in America here.) Of course, making purchases on your card and paying them off quickly (and on time) will generally boost your credit.

Remember, too, if your credit is looking a little lackluster and you’re having a hard time qualifying for any type of credit card, you may be able to improve your scores by disputing errors on your credit report, paying down high credit card balances and limiting new credit inquiries until your score rebounds.

[Offer: If you need help fixing errors on your credit report, Lexington Law could help you meet your goals. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

 

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How to Use Your Shopping Addiction to Build Credit

shopping-addiction-store-credit-card

If you love to shop, it’s possible to use your fashion sense to help improve your financial sense by building, or even rebuilding, your credit. Here’s how.

Store-branded credit cards are some of the easiest cards to qualify for and are often extended to those who even have bad credit because they have lower criteria than traditional credit cards. Using them, especially if you’re loyal to a particular store and shop there all the time, can bring card rewards, discounts and, if you pay your card off every month, better credit.

Immediate Savings

In most cases, when you apply for a card, the retailer will offer you a discount on that day’s purchases. Sometimes the new account discount will be extended for purchases made within a short time period (24 hours, for example), as an incentive to get you to spend more. The risk here is that instead of saving money, you end up spending more than you had planned, so it’s good to be wary.

Watch Your Credit Scores

When you open your new credit card, you may see a dip in your credit scores for two reasons: One is the inquiry that is created when the issuer checks your credit score. This inquiry may cause your scores to drop, though usually not more than a few points. In addition, a new account with a balance is often seen as a risk factor. But as long as you pay on time and keep your balances below 30% of your credit line, ideally 10%, you could eventually see a slight rise because you’ll have a positive new credit reference which can prove beneficial if you are trying to build or rebuild credit.

As you use your new card, you can track how your usage and payments are affecting your credit by signing up for Credit.com’s free credit report summary. In addition to getting two free credit scores, you’ll get your very own credit report card that tells you how you’re doing in the five key areas that are included on your credit report and determine your credit score – payment history, debt usage, credit age, account mix and inquiries.

Be Aware of the APR

Interest rates for department store credit cards are almost always on the high side, often 19% – 22% or more. If you carry a balance, the interest you pay will likely exceed the amount you saved with the discount. This means carrying a balance could hamper your goals, especially if you fail to make on-time payments.

Given store credit cards’ high APRs, you won’t want to go on a shopping spree with them, nor will you want to put more purchases on the card than your budget can handle. (For tips on cutting back without feeling deprived, you can go here.)

That said, making a couple of small purchases a month, say, on home essentials or groceries, and paying them off quickly (and on time) will likely beef up your credit.

Before You Apply 

Before you fill out an application, you’ll want to know where your credit stands so you have a good sense of what APR you might qualify for. Knowing your score will also inform your decision to apply for a card in general, as inquiries on your credit report can cause your score to take an unnecessary hit.

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