Credit Cards: Should You Ever Pay an Annual Fee?

It often doesn't make sense to pay an annual fee for a credit card. Plenty of cards today come with with no annual fee, and some that do charge a fee provide few perks that consumers can't get for free elsewhere. Occasionally, however, a card offers benefits that truly justify the cost of an annual fee. Here are four circumstances in which the expense might be worth it, depending on your spending habits and travel patterns.

Why Do Some Credit Cards Charge Annual Fees?

Annual fees used to be common on credit cards and helped card issuers to be profitable. They are less common in the current credit card market and typically exist only at the two extreme ends of the market—the premium travel card market (for cards that offer large bonuses, hefty rewards-earning structures, and premium travel benefits) and the subprime market (for people with bad credit who may not have any other options).

In other words, today's annual fees are charged either in exchange for exceptional value for the well-heeled or for mere access to credit for the low end of the market.

4 Reasons You Might Decide to Pay an Annual Fee

1. The Card Offers a One-Time Bonus That Justifies the Annual Fee

Many annual fee credit cards offer substantial incentives to get you to open an account. Common rewards include enough frequent flyer miles to pay for a roundtrip airline flight, a generous statement credit that offsets some of your purchases, or points that can be redeemed for gift cards or travel expenses.

Obviously, if the annual fee is $100 and the bonus is worth $100, there's little reason to apply. But if the annual fee is $125 and the incentive is $655 worth of airfare, you might want to take a second look.

The Citi Premier Card, for example, has been known to offer such opportunities. One promotion offered 60,000 ThankYou points, which could be redeemed through the ThankYouTravelCenter for $750 worth of travel expenses. Cardholders had to spend $4,000 within three months of opening the account to get the points. The net benefit was $655 after the $95 annual fee (waived for the first 12 months).

2. The Rewards You'll Earn From Everyday Spending Exceed the Cost of the Annual Fee

It's pretty easy to find a no-fee credit card that offers 1% cash back on all purchases, or that offers a higher cash back percentage in categories that change from month to month. What's not so easy to find is a credit card that offers a high percentage of cash back, month in and month out, on necessary purchases. To get a deal like this, you'll likely have to pay an annual fee, but depending on your household's spending habits, you could come out far ahead.

The American Express Blue Cash Preferred Card, for example, offers 6% cash back at U.S. supermarkets (up to $6,000 of purchases), 6% back on select streaming services, 3% at U.S. gas stations, and 1% back on everything else in exchange for a $95 annual fee after the first year. If your family spends $500 a month on groceries (or $6,000 a year), 6% cash back would give you $360 a year, for a net benefit of $265. If you spend a lot on gas, the card becomes an even better deal.

3. The Card Offers Ongoing Travel Perks Worth More Than the Annual Fee

If your travel patterns align with the incentives offered by a particular credit card, rewards can be substantial. For example, if you frequently stay at Marriott hotels, you could be earning numerous free hotel stays with the Marriott Bonvoy Brilliant American Express Card. This card has a hefty annual fee of $650 but, among other perks, offers a $300 annual dining credit.

After opening an account, cardholders are also credited with 95,000 bonus Marriott Bonvoy points (estimated value of $1,425, according to Investopedia's calculations) after making $5,000 in purchases within the first three months. Cardholders also get six Marriott Bonvoy reward points for every dollar of purchases at hotels, three points for spending at U.S. restaurants and on airline flights, and two points on other eligible purchases. The card also offers a free night's stay at Marriott hotels annually. Taking all of these rewards into consideration, it's relatively easy to get enough value to make up for the annual fee.

4. The Only Card You Can Get Approved for Has an Annual Fee

If you have poor credit, are trying to rebuild your credit score, and the only card you can get approved for has an annual fee, the fee could be money well spent. A better credit score can mean the difference between being approved for a loan or not. It can also mean substantial savings on a loan because people with higher credit scores generally qualify for lower interest rates. The key is to pay the annual fee only while you're working toward a higher credit score. Once you've arrived, switch to a different card that doesn't carry a fee.

Investopedia publishes a regularly updated list of best credit cards for bad credit.

The Bottom Line

Paying an annual fee for a credit card can make sense for some people and under some circumstances. But if you fail to pay your balance in full every month or if you have a habit of making late payments, interest, penalties, and other fees will probably overshadow any benefits you receive. Also, keep in mind that if you have to spend more than you otherwise would to get these deals, they aren't really deals. So before you sign up for any credit card with an annual fee, calculate whether it really offers a net benefit in your specific situation.