Why do people pay high annual fees on credit cards?
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Dear Cashing In,
Are there any real benefits of having a credit card that comes with a high annual fee? Why would anyone pay hundreds of dollars to carry a credit card? -- Carol
To answer your question, it helps to take a quick look at how credit cards have evolved over time.
Although the first versions of what we think of as credit cards began appearing in the 1940s and '50s, by 1970, there were still fewer than 1 in 5 American households that had one. It was still a relatively new concept that allowed people to avoid carrying huge sums of cash or writing checks, which at the time were not widely accepted when traveling away from home.
You used the card, the merchant gave you what you bought, and the bill arrived later. That was the appeal.
Fast forward to today. Roughly three-quarters of Americans have credit cards. Those that have cards have an average of nearly four cards. There are several hundred million cards in circulation. The idea isn't as novel as it once was.
This short lesson in credit card history is meant to illustrate how much our concept of credit cards has changed over time.
Today, with so many cards in circulation, issuers have to find a way to differentiate their cards from those of competitors. Maybe it is through lower interest rates or more reasonable fees, or a really cool card design, or outstanding customer service.
However, those potentially distinguishing features don't mean a lot to many people. If you pay off your bill every month, a card's interest rate does not matter to you.
Card issuers have found that one way to distinguish their cards is by offering rewards. They forge partnerships with airlines and hotels, and offer frequent traveler points. They dangle cash-back on purchases, perhaps with greater rewards in certain categories.
Those rewards can cost card companies a lot of money. But they also entice consumers to flock to their cards. And the card companies have discovered that people will pay annual fees to receive some of these rewards, because the value of the rewards to the consumer can be higher than the annual fees.
For instance, there are high-end reward cards that come with access to airport lounges that have annual fees less than the cost of a year's membership to the airport lounge alone. A lot of cards with annual fees come with sign-up bonuses of airline miles that can be used for flights that would cost much more than the card's annual fee. And there are some reward cards with more modest rewards that have no annual fee. Most of the top-end reward cards require excellent credit.
If you're just looking for a plain-vanilla credit card to charge purchases, there are plenty of cards like that. If you don't pay off your credit card bill every month, then you should find a card with a low interest rate.
But if you pay off your bills and have strong credit, it can pay to look at rewards cards -- even those with annual fees. Not everybody is interested in airline lounges and elite travel perks, which come with cards that cost hundreds a year. But there are plenty of cards with more modest annual fees that can be worth exploring.
See related: Getting started with rewards cards
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