There's no doubt about it: More credit card issuers are adding or increasing annual fees. But there are still plenty of no-fee options, so before you sign up for a new card with an annual fee, make sure the benefits are worth the costs.
Spurred by the Credit CARD Act and new Federal Reserve Board regulations that limit the types of fees that credit card issuers can impose, card issuers are looking to increase revenues by adding or raising annual and other fees. In fact, 35 percent of all credit card offers mailed to consumers in the last quarter of 2009 carried an annual fee, the highest percentage in the past decade, according to Synovate Mail Monitor, a direct mail tracker.
"When considering a new card with a fee, look at what the card offers for that fee," says Gregory B. Meyer, Community Relations Manager at Meriwest Credit Union in San Jose, Calif. "Do they offer travel protection or travel insurance? Do they offer rewards points? Do you get discounts from airlines, hotels or stores?"
Here are five key questions to ask to determine whether it makes sense to pay an annual fee:
1. Are the benefits really exceptional? If your credit card offers lots of top-notch rewards, a lower interest rate or better payment options, that's worth a fee for many consumers and entrepreneurs, says Scott Gerber, a columnist at Entrepreneur Magazine. Highly desirable rewards and perks include flexible payment options, lower interest rates, additional extended warranty coverage, concierge services, loss protection services for canceled trips or lost luggage, and the ability to avoid preset spending limits.
Charlene Anderson, an artist and designer, says the fee she pays for her American Express platinum card is worth every penny. "The concierge service, the extended warranties on items purchased, the loss protection and the membership rewards are just a few of the reasons I think the fee is worth it," she says. "I get my fee returned many times over in services and warranties."
2. Will you definitely make use of the rewards or benefits offered? If you're earning rewards but not using them, paying an annual fee is a waste of money. And all too many consumers don't take advantage of their rewards programs, says Henry Helgeson, co-CEO of Merchant Warehouse, a provider of merchant accounts and credit card processing solutions in Boston. "The number of rewards cards transactions we're seeing doesn't correlate with the number of people getting rewards," he says. "People aren't using all the rewards they have."
Gerber agrees, saying, "Think about how much the rewards or services you are being offered is worth to you. Do they fit into your personal or business life? Will you use them? If they do fit and you'll use them, how much is it going to cost you to outright purchase those things versus getting them through a reward?"
3. Are the rewards easy to claim and use? The more hoops you have to jump through to claim your rewards, the less valuable they are. You want an easy-to-find link on the card issuer's website to the rewards site. Once you are on the rewards page, it should be crystal clear exactly how many points you have and what you can get for those points. If you need to talk to a customer services rep, the number should be easy to find, you should be able to get right through to a real person and get understandable responses to your questions.
"Cash back cards take a lot of work, as the reward categories frequently change," says Gail Cunningham, vice president of public relations at the National Foundation for Credit Counseling. "Some airline mileage cards may include blackout dates, be specific to certain airlines, have caps or expire."
4. Are there hidden fees? What seems an attractive deal on a rewards card may not be, if you need to pay an extra fee from a rewards card service provider to claim your rewards. That's the case with some airline miles cards, where the airline might charge $150 to redeem your miles, says Helgeson. If you're paying an annual fee in addition to a fee to claim your miles, you might be better off just buying a plane ticket outright and sticking with a no-fee card.
Other cards give cash back but will only cut you a check once you hit a certain number of points, so if you don't spend enough money to get the cash, you don't get anything. "If you need 25,000 points to get $250 cash back and don't get a dime until you get those 25,000 points, any number of points less than that is essentially worthless," Helgeson adds.
5. Have you done your research to get the best deal? If you're looking for a new card and considering paying an annual fee, your due diligence should include comparing rewards cards that have a fee with those that don't and calling customer service to get more information if there is something you don't understand. Many credit cards don't offer a lot of specific information about redeeming rewards on their websites and in mailings, so make sure you know what you're getting into before you get a new card.
If you already have a rewards card, check periodically to make sure the benefits you originally got the card for still exist, says Scott Testa, a professor of business administration at Cabrini College in Philadelphia. "Credit card companies generally are not in the business to advertise what they're taking away from you," he says.
And make sure to call your card issuer and ask them to waive the fee every year, Testa adds. "You've got nothing to lose," he says. "The worst case, they say no."
See related: 7 things you must know about credit cards, 5 key federal laws help protect cardholders, 8 tips for keeping card rates and fees low, 10 worst credit card mistakes, 7 ways to get the most out of rewards cards, Credit card reform arrives in the form of the Credit CARD Act, A guide to the Credit CARD Act, Credit card concierge services