Credit Cards with No Annual Fee: What Are They and How They Work
Updated: December 1, 2020
You’ve probably heard about “credit cards with no annual fee” on the television or from ads on the internet. If you’re not sure what exactly they are, it’s okay. We’ve put together this article to help you understand these types of cards.
What Is an Annual Fee?
An annual fee is a very common charge that credit cards automatically apply to your account per year. It pays for the extras that accompany your card. Credit card annual fees can be as low as $25 or as high as $500, depending on what you receive. A higher fee usually accompanies a more premium perk package.
Why Do Credit Card Companies Charge Annual Fees?
The bonuses you receive cost your credit card company money. This could be the percentage cash back that your credit card company offers through various categories. It could also be the cost of travel rewards such as free Global Entry or upgrades to your travel experience. Your credit card company uses part of this yearly charge to pay for your rewards and perks to their customers. They use part of the fees to pay for goods and services from their third-party contractors.
The annual fee is applied in one of two ways. It can be charged once a year, in a specific month. The other method is to divide the expense into 12 equal payments, adding each payment to the monthly bill. This can be better if the expense is a large one. It is also a good option for a credit card with a small limit (to save on card utilization).
What Are Credit Cards with No Annual Fee?
Credit cards with no annual fee are cards that do not charge a fee every year for using them. It’s pretty common to find a card that does not have an annual charge. They are more likely found on cards which give premium perks or benefits of a high monetary value.
There are two types of no annual fee credit cards. They are the “no annual fee forever” card, and the “no annual fee for the first year (sign-on bonus)” card.
No Annual Fee Forever
A credit card which has no annual fee forever will be free for the lifetime of the card. There is no promotional period before an expense is applied to your account. This type of cards is best for users who don’t want to pay for premium benefits. They don’t think they will get much use out of it.
No Annual Fee for the First Year
A common option for cards that charge an annual fee is to waive it for the first year of the card’s life. The fee is automatically charged to the credit card account starting from the thirteenth month.
Remember to check out how closing the credit card account may impact your credit score before doing anything. You may have the option to switch to a different card (without an annual expense) from the same issuer. Doing so may result in fewer benefits available to the card account holder. You may want to cash in any bonuses before you switch cards.
Pro Tip: You may be able to avoid the annual expense for subsequent years by charging a minimum amount to your card by the end of the year. Each card may have different minimum amounts. You will need to contact your credit card issuer to find out more information.