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I currently just have a Visa credit card. A place I shop at doesn't accept them. I'm looking at getting a second credit card such as Mastercard. I am surprised by how many highly recommended cards there are with annual fees. Why would someone ever want a credit card with a fee when free options are available? Is it just because the benefits associated with it? To me it seems obvious, I want my credit to be a credit card, everything else is "nice to have".

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    For the same reason just about anyone makes almost any, if not all, decisions: because the pros outweigh the cons for them. The underlying question you may indirectly be asking here is what kind of benefits different credit cards offer, but that's arguably asking for a list, which is off topic. – NotThatGuy Jan 10 at 16:56
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    There are free cards? – Clockwork Jan 10 at 23:11
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    Some cards with annual fees have conditions that allow the fee to be waived. Some banks accounts also have those options, like free cheques... so one time I just happen to have enough money for said account's fees to be waived, switched over for 1 month, and ordered 5,000 fancy cheques for free, then switched back, and cost me nothing. – Nelson Jan 11 at 0:54
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    I don’t know about Canada, but at least in the U.K., I’ve never encountered somewhere that supports Visa but not MasterCard (or vice versa). Here, AmEx is the odd one out. Are you certain your shop will support MasterCard Credit? – Tim Jan 11 at 10:07
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    @NotThatGuy The idea that people make decisions because the pros outweigh the cons supposes that decisions are rational. They are not. – gerrit Jan 11 at 14:27

14 Answers 14

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The perceived, or actual benefit value, exceeds the cost. (Or people just want to act fancy, yes that's a larger percent of customers than you may expect)

Remember that the credit card company charges the vendor 1-5% per transaction. Therefore, they can afford to let the customer make back more in benefits / cash back / special offers than they spend for the annual fee. This is the same reason that free cards can offer 1% or 1.5% cash back.

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  • Thanks! I know this answer didn't get a lot of votes compared to others, but I like how it's straight to the point without a bunch of personal anecdotes. – titchseason yesterday
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For the first time in my life, at 54 (4 years ago) I signed up for a card with a $99 fee, after the first year.

My daughter was at college, and there was one airline with very convenient times to her city. The card offered a 60,000 mile bonus after spending the first $1000. That alone was worth nearly $1000 in flights, as our round trips were short enough for 20,000 miles to cover a ticket.

That was a one time bonus. Why did I let it renew? "First bag checked free". Checking a bag on the plane cost $35. If my wife and I checked a bag each, that would cost $140. For one trip. She transferred schools, and I wound up canceling the card, but had she stayed, I'd have paid for the 3 years fees, and saved the annual fees on the checked bag cost alone. The other perks were nothing special, nothing different than most cards offered.

In any case, a logical person is looking at the perk offered vs the cost of the annual fee. There is a credit card that boasts a 6% reward on the first $6000 in supermarket purchases each year. This comes with a $100 annual fee. Now, the card we have used for 20 years has no fee and gives 2% back on all purchases, no limit. The $360 supermarket reward/rebate compares to the $120 we'd get anyway. After the $100/year fee, I'd be ahead by $140. My frame of reference is different from the member who has no such 2% reward card. For me, the card is uninteresting. I can see how others might find it appealing.

In the end, it's a question of whether the perks are worth the cost and not available for free elsewhere.

Edit: I looked at the first card on the list you linked. 5% for groceries and dining out. I can see this easily exceeding the $120 fee and making it a desirable card. A couple, just 2, that don't eat out often? Not really. The family of 4-5, with the couple going out to dinner every Saturday, and frequent take-out during the week? They might earn back the $10/mo (details say this is how the fee is billed) fee on a single night out.

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    Of course a card that gives 2% back on groceries isn't worth much if the grocery store you usually shop at doesn't accept credit cards at all. (And has prices well below those that do.) – jamesqf Jan 10 at 18:28
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    Well, of course! Just like the airline card was useful to me for a year, but no longer. Nor is the 2% back on gas good if they give you a 6 cent discount for cash. This is 100% conditional on use case. – JTP - Apologise to Monica Jan 10 at 18:36
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    Checked bag free is a very common case to make a card with a fee worthwhile. – Loren Pechtel Jan 10 at 22:18
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    @gerrit - that is a different Q&A - Do people tend to spend less when using cash than credit cards? and a bit of a tangent to this question. – JTP - Apologise to Monica Jan 11 at 16:16
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    While this isn't exactly an annual fee for the card itself, I have an Amazon Prime credit card that comes with my Prime membership fee, and I get unlimited free 1-2 day shipping for that. – R.. GitHub STOP HELPING ICE Jan 12 at 21:00
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Some cards offer perks that may be valuable to certain customers. For example when I used to travel frequently I paid for an Amex Platinum card. There's a perceived prestige to use this card and it also allowed me access to many premium airline lounges. It also granted me certain upgrades without the normal fees, and I had enhanced financial protections in many countries which might not be guaranteed with other cards. It, and other similar cards, granted me cash advance priveleges at different foreign banks.

These may be things that are of little value to others, but they were valuable to me at that time in excess of the cost of my membership.

Like any membership, you need to determine if the value is appropriate for you and your circumstances.

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    I used to have an Amex card but when I tried to use it I was frequently asked by the retailer, hotel or taxi driver "Have you ANY other card please sir?". So much for the perceived prestige or their "That'll do nicely" slogan. Amex fees to the retailer were so much higher than anyone else's – uɐɪ Jan 12 at 11:49
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    I feel like there's some context missing here; merchant charges and interest are already more than enough to cover the costs of any advertised perks on any card I've ever seen. The annual membership/cardholder fee is in essence a "fee for no service" situation. Nobody should pay it, but some do. The credit-card companies are charging it because they can, not because they need to in order to provide certain perks. Credit companies, banks, and other card issuers are consistently, ridiculously profitable, with or without fee-generating cards. – aroth Jan 13 at 2:33
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People pay an annual fee for:

  • Extra benefits they use: cash back, airline miles, hotel perks, no foreign transaction fees...
  • Extra benefits they think they will use: airline miles, hotel perks, no foreign transaction fees... ...
  • Prestige: the color of the card tells everybody that they paid for the expensive one...

Is it worth it for you? To some people it is.

Of course with more and more transactions being done from home, or where we never hand the card to the cashier, fewer people get to notice the color of the card.

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  • I would also add "insurance" to the list of benefits. My card comes with free travel insurance for both me and my family members which has already paid for itself many times over. – Etheryte Jan 12 at 16:15
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I have a bunch of different credit cards for different purposes. Our main spending card gets 2.65% cash back at $0 annual fee.

We have one card that charges an absurd annual fee of $525. Why would ANYONE pay that? Turns out you get $300/year in travel credit which it reduces it to $225 and it comes with a free premier-class membership to Priority Pass, which gives great access to a large number of airline lounges and typically cost $425 on its own.

So we get this membership for a net cost of $112 per person. Even in a travel hostile year like 2020 we have more than broken even on that one. Dinner and drinks at an airport or NOT cheap.

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  • Which card is the 2.35? Isn't the BofA 2.625%? CSR also raised their annual fee to 550+75 after this year. – obscurans Jan 11 at 1:33
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There are some good answers here. A common theme among them is "people pay the fee because it's outweighed by the benefits".

I agree that that is true, in some cases. However, I think there is an implicit suggestion in your answer, and I think in some cases it is also correct: people pay the fee because they are making a mistake. It is possible for the benefits to outweigh the fees, and in many cases it's pretty easy to make it pay off. But not everyone who obtains such a card actually does that. Some get the card for perceived prestige but don't make enough use of the actual benefits to pay off the fee.

This isn't to contradict other answers here, but just to add another reason that, in practice, explains why people get such cards. They fall for marketing, as with so many things.

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  • "Prestige" may be a benefit to them, of course... Like a gold iPhone or whatever, no one expects that to pay for itself. – user3067860 Jan 11 at 22:04
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My bank account is at the GLS Bank, a "social-ecological bank" in Germany.

The fees, including the ones for credit cards, are high compared to basically any other bank.

The advantage is, to me, that my money is only used for projects that I deem worthwhile and that are aligned with my social and environmental values.

Sure, I could get a couple of hundred € more every year, but then my money might be used for coal mining or the arms industry.

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    When you use a credit card, you're not spending your money, at least not at first. I can see how this reasoning makes sense for savings (and indeed I have my savings with an ecological bank as well), but how does it apply when you are the one borrowing money (apart from the more vague "I don't want to shop at the same store that evil company X does")? – gerrit Jan 11 at 14:32
  • @gerrit: You're right. I never bought anything I couldn't afford to pay cash (except my flat) so I totally forgot there's the word "credit" in "credit card". I only use my credit card because there are (few) services which don't accept anything else. – Eric Duminil Jan 11 at 14:53
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    Additionally, customer fees in Europe are generally higher than in the US, since the EU limited the rates, that credit card companies can charge the merchants. So if the credit card companies or banks don't get that much money anymore from the merchants, they either have to scrap the benefits of credit cards or increase customer fees. – dunni Jan 12 at 10:55
  • Downvoter : constructive criticism is welcome! – Eric Duminil Jan 13 at 14:20
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I agree with the answers given. Adding one additional motivation:

Credit challenged customers may not have a lot of options. Especially when rebuilding credit after something like a bankruptcy, consumers will generally take what they can get and consider the fees a cost of reestablishing a good credit score.

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It’s the same as with any other purchase — because the perceived benefit to the purchaser exceeds the cost. The most likely reason for that to be the case is more generous cashback offers than free cards. If you spend $20,000 per year on your card (or can easily arrange to do so), then it’s worth paying up to $399 per year for 2% cashback.

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    2% of $20K is $400. Paying $399 for a $400 is not worth it, especially when feeless cards pay 1% or 1.5% cash back. – RonJohn Jan 10 at 11:01
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    @Mikescott I get your point, but if the free card gives you %1 cash back, then you would be paying $399 for an extra $200. – mhoran_psprep Jan 10 at 12:31
  • Pay $399 to get 2$ cash back? There are free cards that give you 2% a year on all purchases (not rotating categories). Some pay even more in certain categories (for example, 3% for grocery stores expenditures). If you want to play the rotating category game, you can get a 5% rebate. – Bob Baerker Jan 10 at 14:25
  • @Mikescott is right on the math, but it's only valid if comparing his hypothetical card to nothing, not against the free card with lower perk. If for whatever reason, I could get the Mike card, vs no card at all, I'd still choose to get his card. (Compared to the one I carry? Not a good deal) Bob - he was making a point, not suggesting the $2 was worth the effort. (And glad you are well, I hope you are 100% soon) – JTP - Apologise to Monica Jan 10 at 14:39
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Some credit card offers have their most attractive propositions in the form of balance transfer options where they chart their profit more on annual fees and less on interest. Many offer no interest for a fixed period of time for transfers.

If you're currently paying over $100 / monthly in interest on one or more variable APR cards and another company is offering 0% interest for 15 months on balance transfers with a $99 annual fee, the offer becomes enticing.

While you might not be able to pay down the entire balance in that period, you're not making monthly payments on the interest any longer, so it starts to snowball faster. This can be a more attractive offer than a low interest consolidation loan if you can in fact zero (or significantly reduce) the balance during the promotional period.

As always, if you don't pay it down aggressively on a schedule where you're sure to avoid interest, the move becomes less and less of a good idea.

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I'm Canadian and I had these two credit cards

  1. CC1: 2 point per $ on everything with 120$ yearly fee and get 10,000 points per year. 1 point = 0.01$ redemption value.
  2. CC2: No annual fee + no rewards

I used my CC1 for each and everything I could use for. Pay the whole amount before end of the month so I would not pay any interest. I also redeemed the points every time it got up to $30 or more. at the end of the year I would get back close to $1300. Yes, I was able to save $1300 each year because I used this card.
It would not have been possible if I did not have those rewards.

BTW, the CC1 was called Capital One Aspire TRAVEL World Elite MC. It was discontinued sometime back.

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  • But I have several cards that give anywhere from 2-5% back with no annual fee. So it doesn't seem logical to pay an annual fee when you can get the same thing for free. – jamesqf Jan 10 at 18:31
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    @jamesqf Canada is not the US; one of the things those Crazy Canucks do differently might be CC benefits. – RonJohn Jan 11 at 0:20
  • I've not seen a card give 2% or more $$$ back without an annual fee in Canada – Viv Jan 11 at 16:09
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There are many great answers that revolve around a general theme, which I think is very well stated in this article:

[It's worth paying an annual fee]...as long as the card's extra benefits outstrip the cost of carrying it.

The article mentions some common reasons (and provides details for each) when it's "worth it" to pay the fee:

  1. You need to build credit (and you aren't necessarily eligible for a no-fee card).
  2. You want better cash-back rewards.
  3. You're eyeing travel perks or a massive sign-up bonus.

I will add a fourth option of my own that I don't believe has been mentioned yet:

  1. If a particular card can save you time. Some cards come with "skip the line" privileges, for example in airports, or at car rental counters, or even for large venues. It's harder to measure the value of someone's time the same way you can compare "I spend $X and it gets me an average of $Y", but it's easy to see that time savings would make sense for certain people. Just yesterday I found myself wondering if I should (for the first time ever) spend $25 to purchase a TV series that I like, just so I don't have to watch commercials. 20 episodes times about 10-15 minutes per episode would save me 3-5 hours of my life, at a cost of $25. This is inconsequential to me in the long run, but if someone who regularly travels can avoid waiting in lines for an hour or more every week, that would have a potentially higher value to that person.
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People trying to reestablish their credit sometimes have no choice but to pay a fee for credit usually they also very limited credit limit.

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  • Are you saying that a person's credit can be bad enough that no-annual-fee secured credit cards are unavailable to them? – jpaugh Jan 12 at 22:34
  • No, he's saying that in some cases a fee based card may be the only option available to them. A secured card with a $500 deposit is completely unachievable for someone who does not have $500. And yes, there are people who do not have $500 to spare. – barbecue Jan 13 at 4:22
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I got extra benefits travelling on an amex gold card. It also provided extra guarantees when I bought expensive items with it.

And there was prestige back then using it. I got first class move to front of line service in Paris when I went to a bank. I impressed clients folks I was travelling with when I was consulting to them.

Now I am not sure about keeping it as I am not working and I do not expect to buy expensive new electronics toys like 80" doublesmart TV or similar.

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