Don’t let the thought of paying a high annual fee scare you away from credit cards. Not all credit cards come saddled with an annual fee. But just how do no annual fee credit cards work?
No annual fee credit cards are a good choice for individuals new to the credit card space because these cards can save you money automatically over a card with a fee. We’ve gathered everything you need to know about choosing a no annual fee credit card so that you can make the best decision for your finances.
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What Are Annual Fees?
An annual fee is a set charge that occurs yearly. For credit cards with annual fees, the charge is applied to your account as soon as you are approved. You will see that same charge on your card anniversary. If you do not pay the annual fee in the billing statement you receive it, you will start to pay interest on it.
Since your annual fee is applied to your charge account automatically, that will affect your credit card limit. For example, if you applied for a card with a $5,000 credit limit and the annual fee is $95, your new credit limit will be $4,905 until you pay your bill. Keep this in mind if you are hoping to use your new card for a big purchase right after signup.
Annual fees do not count for sign-up bonuses and they do not earn points or cash back.
Annual fees vary by card, with most fees starting at $95. Some cards, like the Chase Sapphire Reserve®, charge a larger annual fee at $450, but the card also comes with more rewards like $300 in annual travel credit.
When Are Annual Fees Typically Charged?
You should see the charge for your annual fee on your first credit card statement. Some cards waive the annual fee of $95 for the first year. The annual fee for that card would then occur on your first anniversary of opening the card. Usually, you will see a one-time charge on the first day of your anniversary month.
For example, if you opened your new card on January 15th, 2020, you should expect a one-time charge for the annual fee the first week of January 2021. Many cards offer anniversary gifts each year, such as a travel credit. If your card does offer annual credits, they will be available at the same time as your annual fee is charged.
Why Do Some Cards Have Annual Fees?
Many cards offer annual fees so that they can offer more rewards to cardholders. In order to attract new cardholders with spectacular sign-up bonuses and perks, they need to offset the cost with annual fees.
Compare two of Chase’s credit cards, one with a fee and one without. The Chase Sapphire Preferred® Card has a $95 annual fee, but you can earn up to $750 worth of travel in your first three months if you hit the spending requirement. The Chase Freedom Unlimited® has no annual fee and offers only $150 as a sign-up bonus.
Are Credit Cards With Annual Fees Worth It?
One of the top questions among credit card users is, “Are annual fees worth it?” When you are trying to save money and stick with a budget, we can see why paying money to use plastic seems like a waste. However, when used wisely, an annual fee card can save money and earn you more cash back than a no annual fee card can.
Let’s go back to comparing the Chase Sapphire Reserve with the Chase Freedom Unlimited. Both are highly-rated cards but pack on different benefits. For the sake of this example, let’s say you spent $5,000 in travel and dining during your first year and $5,000 on all other purchases.
For the Chase Sapphire Reserve, you will have paid $95 for an annual fee, but you have the possibility of earning over $937 towards travel after sign-up bonus and points back. Plus, you get other perks like no foreign transaction fees and limited travel insurance and protection. By the end of the year, you pocket $842 worth of travel.
For the Chase Freedom Unlimited, you will have paid $0 for an annual fee and have earned up to $350 back after sign-up bonus and cash back from spending. By the end of the year, you pocket up to $350 in cash.
Benefits of No Annual Fee Credit Cards
In many cases, paying an annual fee is worth it if you use your card wisely and can maximize the card’s benefits. But what is a no annual fee credit card worth? If you are new to using credit cards or are looking for a card to boost your credit, no annual fee cards have many benefits too. Here are the top benefits of no annual fee cards:
- Rewards: No annual fee cards offer you more back on your spending than if you just use your debit card for purchases. If you switch your main spending to a rewards credit card rather than your debit card, you can earn several hundreds of dollars back each year without changing your budget.
- Travel: Look for cards that offer travel perks, like $0 foreign transaction fees or travel protection. The Bank of America Travel Rewards credit card has a no annual fee card offer, along with 1.5X points on purchases and $0 foreign transaction fees.
- Cash Back: Some cards offer maximum cash back without an annual fee. The Bank of America Cash Rewards credit card has rotating cash back categories that earn 3% back in the category of your choice.
- 0% APR Introductory Rate: Looking to save on a large purchase? Several no annual fee cards also come with an introductory 0% APR for 12-15 months. This can help you pay off a large purchase without paying extra for interest.
- Easier to Budget: If you are on a tight budget, a no annual fee card can give you credit card benefits without adding any burden to your existing budget.
- Building Credit: Many of the top annual fee cards require excellent credit, meaning many applications will be rejected due to not having a well-established credit history. You can build up your credit score and history with a no annual fee card.
Who Should Use Credit Cards With No Annual Fee?
An annual fee credit card isn’t for everyone, but a card without an annual fee might be a better choice for the following:
- New Credit Users: If you are just dipping your toe in the credit card game, start with a no annual fee card with a sweet sign-up bonus.
- Occasional Credit Card Users: If you don’t whip out plastic for every purchase, then a card with an annual fee might not be worth your time. Instead, keep a no annual fee card in your wallet in case of emergencies or for added protection on online and gas station purchases.
- People Consolidating Debt: If you are trying to tackle your debt load in 2020, then you don’t need an annual fee card to do so. Instead, look for a card that comes with a 0% intro APR for transfer balances. You will have to pay a fee for the initial balance transfer, but the extended 0% APR can help you pay off your debt without worrying about costly interest charges.
What Are the Best No Annual Fee Credit Cards?
Paying an annual fee can negate many of the credit card benefits you enjoy most. Whether you’re trying to maximize cash back, save money with a no-interest offer, or simply enjoy the perks of a particular card product — credit cards without annual fees are a popular option. Luckily, some of the best no annual fee credit cards on the market today earn excellent rewards.
Here’s a look at a few of our favorite no annual fee credit cards. Visit our full review of the best credit cards with no annual fee to compare even more popular cards.
1. Best for Choice of Cash Back: Bank of America® Cash Rewards Credit Card
2. Best for Travel Rewards: Bank of America® Travel Rewards Credit Card
4. Best for Earning Points: Chase Freedom Unlimited®
Now that you know how no annual fee credit cards work, you can decide if you should have one in your wallet. Take a look at our Credit Card Hub to see the most recent reviews and card offers.