Annual Fee Credit Cards: When They Make Sense

When it comes to choosing a credit card, most people skip annual fee credit cards and look for other benefits like lower interest rates, cash back and travel rewards.  The best credit card features typically come with fees, however, by paying the annual fee you can often save money and earn more rewards points.

Annual Fee Credit Cards

If you carry a balance, consider switching to a low interest annual fee credit card like the TD Emerald Visa.  This card comes with a $25 annual fee, but depending on your credit assessment the current interest rate can be as low as 4.75 per cent, and no higher than 12.75 per cent.

The TD Emerald Visa can save you money as long as you carry a balance, unlike balance transfer credit cards that lure customers in with an introductory rate for six months before jacking it up to 20 per cent.

This chart compares the total interest paid for one year on a $4,000 balance using three different credit cards:

Credit card Interest rate Annual fee Monthly interest Total cost (interest/fees)
Basic credit card 19.99 $0 $66.63 $799.56
Balance transfer card 0.99* $0 $3.30 / $66.63 $419.58
TD Emerald Visa 9.75 $25 $32.50 $415

*for six months – 19.99 per cent thereafter

The TD Emerald Visa comes out ahead, even after paying the annual fee.  If it’s going to take a few years to get rid of your credit card debt, you can save money by switching to a low interest rate card.  Paying an annual fee for a better rate may be worthwhile.

Once you’re out of debt and have a good grasp on your finances – including paying off your credit card balance in full each month – consider switching to a rewards credit card.

A cash back credit card like the Scotia Momentum Visa Infinite comes with a $99 annual fee; however cardholders earn four per cent cash back on groceries and gas, two per cent cash back on recurring bill payments and drug store purchases, and one per cent cash back on all other purchases.

Compared to a no-fee rewards credit card, your rewards can really add up when you spend $3,000 or more per month on your credit card.

Credit Card Annual fee Reward % Total rewards (minus fees)
PC Financial MasterCard $0 1 $360
MBNA Smart Cash MasterCard $0 3 / 1 $432
Scotia Momentum Visa Infinite $99 4 / 2 / 1 $561*

*assumed $700 spending on groceries and gas, $300 spending on recurring bills and pharmaceuticals.

Credit card issuers charge a premium fee for special features associated with the card.  Annual fee credit cards can make sense in some circumstances, whether you’re struggling to get out of debt or you’re trying to earn more rewards.

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