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No-Annual-Fee Credit Cards
1 Oct 2019

The Cost of “Free”: The Difference Between No-Annual-Fee Credit Cards and Cards That Have Annual Fees

Since the invention of the first credit card, the credit card industry has evolved to offer perks that fit every budget. No annual fee credit cards mean you can avoid a membership cost every year to own the card.

Though it sounds like major savings, there are other ways you make up the difference in the cost of the annual fee for the creditor. To decide whether a credit card with annual fee is worth it, consider the top benefits of owning a credit card with a membership fee.

No Annual Fee Credit Cards

The idea of paying to own a certain type of credit card can seem like a contradiction.

Enter no annual fee credit cards. If you’re new to credit, the promise of no membership fee each year can sound like major savings.

Consider the difference between a nightclub with a cover charge and one without. The nightclub without a cover charge will find a way to recoup sales in other ways. Credit cards work in a similar way.

Credit card companies create programs for cardholders to entice them to spend more. These programs come at a fee to offset the expense of the bonuses and rewards to the creditor.

No annual fee credit cards have no or very low costs associated with benefits to the cardholder.

Fewer perks and a more rigid approval process usually comes with not having an annual fee. Credit cards charge annual fees for reasons ranging from high return perks to high-risk borrowers.

Bad Credit

Bad credit happens. Some people are driven to cards with annual fees because they simply have no other option.

In many cases, it is the best option available on the path to financial repair. These cards offer second chances that help borrowers demonstrate they’ve improved their financial habits and can be trusted with higher balances.

If your credit history is too extensively damaged, you might even qualify for an annual fee credit card for poor credit. Consider yourself privileged if offered the opportunity to pay a small fee in exchange for rebuilding your credibility.

Here are a few tips when using an annual fee credit card to repair credit history:

Keep Your Balance Low

The rule of thumb when owning a credit card is to keep your balance below 30 percent of the overall credit limit. This means that if you have a credit limit of $1,000, your credit card balance shouldn’t reach more than $300.

If you need to charge more than 30 percent, always pay it off before the end of your billing cycle to avoid negative credit reporting. Credit cards can help or hurt your credit score depending on how you manage your balance.

Keep in mind that annual fee credit cards start you off with a balance right away. This balance might be a large part of your credit limit. Pay this off immediately.

When you reach the end of the year, avoid carrying a balance into the new year when your annual fee is due. You don’t always get a reminder that the annual fee will be charged.

Annual fees can take your credit card balance over the limit resulting in negative credit reporting and fees. The creditor might also choose to raise your interest rate as a penalty.

Pay on Time

Credit cards shouldn’t be treated as installment loans. If you have poor credit, your goal is to show good money management, not uncontrollable impulse.

Pay your balance in full, when possible, before the end of your billing cycle. This shows responsible credit management and allows you to maintain a balance below 30 percent of your overall credit limit.

Creditors report your on-time payment along with your low balance to the major credit bureaus each month. With time, your score will inevitably improve.

Don’t Close Your Account

No matter how long you hold a zero balance on your card, it’s not a good idea to close the card. The amount of credit you have available to you helps your credit score.

If you have three cards with credit limits of $1,000 each, you have a total of $3,000 in available credit. Spending $500 on one card has less of an impact in this scenario because the total available credit is considered in addition to the amount available on one card.

The card you keep open with a zero balance offsets any spending on other cards you might use more often. Guard against leaving a card inactive for too long if it’s your only credit card.

An inactive card doesn’t help prove good financial management. Try charging small expenses like coffee or lunch to your card and repaying the small balances right away.

Annual Fee Cards for No Bank Account

There are annual fee credit cards that allow you to circumvent credit checks altogether. Secured credit cards commonly charge fees to open the card along with a bank account in good standing.

Most secured cards require a bank account, but the OpenSky Secured Visa welcomes applicants without bank accounts. This card has no credit check and a minimum opening deposit of $200.

The opening deposit may seem steep but it helps creditors guard against default. Consider it proof you have the financial standing to properly maintain a credit card balance.

Few credit card companies take on the risk of no credit checks and no bank account. The annual fee associated with your card is nominal in comparison to the high-interest rate you’ll suffer long term if you don’t repair your credit history.

Average Credit

Having average credit sets you apart only slightly from those with poor credit. Unfortunately, deals for applicants with average credit are slim and still usually involve fees.

Unlike those with bad credit, however, you are a few billing cycles away from boosting your credit score. Choosing to pay the fee for the first year or two of owning the card can work wonders for your credit score allowing you a better selection of offers and interest rates.

Choose a credit card that also offers rewards to break even. Credit cards like the QuicksilverOne Cash Rewards Credit Card offer a percentage of money added back to your credit card balance if you spend over a certain amount.

These cards can mean breaking even when you manage your credit card balance correctly. If you’re a heavy card user, you may even earn an amount above and beyond the amount of your annual fee.

High Annual Fees

Credit cards with annual fees are known for better perks than credit cards with no fee. When it comes to travel, cash back or shopping rewards, not having a fee can also mean missing out on savings.

It’s important to do the math before signing up for a card with a $400 annual fee. Reward cards have little relevance if you never use the card for purchases beyond a certain amount.

Some cards require you to spend with a particular retailer in order to qualify for benefits. Take inventory of your purchases with that retailer in previous years. If it doesn’t exceed the amount needed to break even with your annual fee, the card might not be worth it.

A few exceptions exist. A new job or sick relative out of state can make a credit card offering cash-back on airline ticket purchases suddenly worth the expense. Airline tickets are a high dollar expense that can quickly surpass even the highest annual fees with equally high rewards returns.

Hotel room fees can offer the same benefit. Cards that offer free nights as a reward can save you hundreds, if not thousands, of dollars each year.

How to Choose

No annual fee credit cards exist that offer perks similar to cards with fees. The availability of these cards is slim and reserved for those with stellar credit.

For the savvy spender, annual fee credit cards are a good bargain in the long run as long as you continue your relationship with select vendors.

Be wary of rewards cards with too many rules. Many creditors offer spending categories where you can expect to receive a reward for each transaction. If the categories have long lists of exceptions, managing the card rewards can be a chore.

Grocery perks are a category where this issue is common. In order for your cash-back rewards to apply, you may be asked to avoid certain big box or warehouse stores that sell more than just groceries.

The Fine Print

No annual fee credit cards are best for borrowers with good to great credit scores. When rebuilding credit or looking for ways to gain exclusive rewards, annual fee credit cards are best.

Read the fine print before making a commitment. The goal of an annual fee credit card isn’t to alter your daily routine, but instead, offer a bonus for habits already in place.

For more information on choosing a credit card that works for your lifestyle, visit our blog. You can find advice on how to get quick loans, same day payday loans, and other guaranteed loan products to fit your immediate needs.

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