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Why Pay for a Credit Card with an Annual Fee?

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Last updated on June 9, 2022

For the longest time, I steadfastly refused to get any credit card that came with an annual fee. The idea of paying a price to use a credit card just sounded utterly ridiculous to me. The only time I ever applied for a card with an annual fee was when that fee was waived for the first year thanks to a promotion. Of course, I was sure to promptly cancel those cards just before the end of my first year of card membership.

I know many Canadians that are as repulsed by annual fees as I was. But as my financial savvy grew, my perspective changed: It doesn’t matter if your card’s annual fee is $29 or $699—sometimes the benefits offered far outweigh the cost. Once I realized this, I had no problem applying for credit cards with an annual fee, provided they were a good fit for my particular lifestyle and needs.

But, does paying a fee make sense for you personally? Let me explain the circumstances in which paying an annual fee for a credit card may be worthwhile for you, and the circumstances in which it’s a waste of money.

An Annual Fee Makes Sense…

…when the insurance benefits outweigh the fee.

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Credit cards can be one of the most cost-effective ways to get high quality insurance for both travel and major purchases. A good travel credit card will likely include most of the below coverages:

  • Emergency Medical Insurance
  • Trip Cancellation/Interruption Insurance
  • Flight Delay Insurance
  • Lost, Stolen, or Delayed Luggage Insurance
  • Rental Car Collision/Loss Damage Insurance
  • Hotel/Motel Burglary Insurance
  • Travel Accident Insurance

Purchasing those coverages à la carte from an insurance company may very well exceed the $120–$150 credit card fee you would pay for a high-end rewards card, plus you get all the other card benefits as well.

Some people may not believe that travel insurance is necessary, but note that your provincial health care does not apply when you’re outside of the country. A quick trip to the doctor in a foreign country could cost you hundreds of dollars if you’re uninsured, while a visit to the emergency room will have a frighteningly high price tag. And travel insurance can really come in handy for other snafus as well: I was thankful that I had travel insurance when a snowstorm caused the cancellation of my flight in Amsterdam. I was able to book a clean, convenient hotel room at the airport and enjoy a good meal knowing that I’d be fully reimbursed by my credit card issuer once I submitted a claim. Other passengers on my flight who didn’t have travel insurance had to wait for the airline to give them meal vouchers and some shoddy rooms for the night.

Your card can also provide very valuable coverage for items you purchase as well, in the form of extended manufacturer’s warranty and purchase protection (covers loss or theft within 90–180 days); mobile device insurance; and price protection (pays the difference of a price drop within 60 days).

…when the sign-up bonus is huge.

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If a credit card offers a sign-up bonus that’s more valuable than its annual fee, then you should seriously consider applying for the card based on that perk alone. For instance, some cash back cards offer 6–10% back on every eligible purchase you make for the first 3–4 months after you get the card, which can add up to $100–$200+ depending on the deal’s spending maximum.

Of course, you should factor in any spending minimums required to get the cash back or bonus points, which is a particularly common caveat for a travel card. Only go for a bonus with a spending minimum if you’d make that minimum anyway based on your regular, everyday spending, or if you have a big purchase coming up that you’re absolutely certain you’ll make.

…when the perks pile up.

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Sign-up bonuses offer a temporary shot of value, but that value is fleeting. If your travel rewards credit card has an annual fee, but you use your cash back card for most everyday purchases, does it still make sense to keep your annual fee credit card? In many cases the answer is yes.

Consider the individual value of the below card perks:

A card that renews those perks every year offers evergreen value; enough to justify a high annual fee. For example, the Scotiabank Passport™ Visa Infinite* Card comes with an annual standard Priority Pass Membership as well as six free airport lounge passes each year – that’s a renewing value of $291 USD. When you convert that to Canadian dollars, it works out to about $360, which is significantly more than the $139 annual fee that you pay for the card. Also, it doesn’t charge foreign transaction fees, so you end up saving 2.5% every time you make travel purchases in a foreign currency. If you spend $3,000 overseas each year that adds up to another $75 that most no annual fee credit cards would have dinged you.

…when you spend big and take advantage of a high earn rate.

Let’s say you have the SimplyCashTM Card from American Express, which has no annual fee and nabs 1.25% cash back on everything. 1.25% is a very respectable rate for a no annual fee card, and you might be hesitant to upgrade to the SimplyCashTM Preferred Card from American Express, which has a $99 annual fee. But the Preferred Card also earns at a higher 2% rate. When is it worth it to fork over the $99? If you make less than $5,000 in purchases per year, you’re better off not paying that annual fee. But most of us will actually rack up that much in spending quite easily. Check out the below annual spending levels, which are conservative estimates for an average Canadian consumer:

  • $3,500 on groceries
  • $2,000 on restaurants
  • $2,000 on gas

That’s $7,500 in annual spending, which would generate $150 in cash back with the Preferred Card. And that’s not including a number of other expenditures like recurring bills, travel, and entertainment.

An Annual Fee Doesn’t Make Sense…

…when you don’t use the benefits.

Times change, and you should periodically compare your current lifestyle with your current card benefits. If your usual travel pace has slowed considerably (pandemic much?), or you’re newly affected by ageism (most credit cards’ travel medical coverage is only valid for those 65 or younger), there’s no point in forking over a hefty annual fee for insurance coverages you’re not really using. Similarly, you may have enjoyed a credit card’s annual companion fare ticket when you and your partner jetted off to romantic getaways every year; but that feature is just wasted money after a breakup or divorce.

…when you can get the benefits you want from a no-fee card.

Some no annual fee credit cards are effectively useless, but there are a number of them out there that may offer a surprisingly decent cash back or rewards rate and a few cool features to boot. If you don’t care about airport lounge access and what you’re really after is waived foreign transaction fees, skip the Scotiabank Passport™ Visa Infinite* Card and go for the Home Trust Preferred Visa instead. That $139 you’d normally pay on an annual fee can be diverted to a fancy travel pillow and a massage between flights.

…when you’re carrying a credit card balance.

If you find yourself routinely carrying a balance on a credit card with a large annual fee, you’re probably better off saying au revoir to your rewards and cash back and going with a low interest card that skips the annual fee (à la the MBNA True Line® Mastercard®)—at least until you’ve paid off all your credit card debt and your spending is in check.

Most rewards and cash back rates top out at 5% or so—compare that with the gouging 19.99% interest those same cards charge on purchases.

How to Stop Paying Annual Credit Card Fees

1. Get a Banking Plan That Waives Your Annual Fee

Many Canadian banks offer bundled banking plans that waive the annual fee on a selection of their premium credit cards. For example if you get TD’s All-Inclusive Banking Plan ($29.95 waived with a $5,000 monthly balance), you can get the annual fee rebated for your choice of one of five premium credit cards, including the TD® Aeroplan® Visa Infinite* Card‘s $139 annual fee (which is rebated the first year anyway if you apply online by September 5, 2022). Similar annual fee waivers are offered with bundled Scotiabank, HSBC, and RBC bank accounts.

Terms and conditions apply.

This offer is not available for residents of Quebec. For Quebec residents, please click here..

2. Call and Ask For Your Annual Fee to Be Waived

You know the old saying “squeaky wheels get the grease”? It’s true. As our very own Wayne Gretzky said, “you’ll miss 100% of the shots you never take.”

In that spirit, if you’ve been a longtime customer, or you’re spending a prince’s ransom on your credit card every year, call your credit card issuer and ask them to waive your annual fee. You may not even have a chequing account with the bank, but your credit card loyalty and/or annual spending level may still make you deserving of a fee waiver.

If nothing else, let them know you’ve received an offer with a fee waiver from a competitor, or that your chequing account with your retail bank waives the annual fee for one of their premium credit cards.

3. Get a Credit Card With a First Year Annual Fee Waiver

You don’t buy a new pair of jeans without first trying them on do you? That same attitude can be applied to your credit cards: Why pay for it before you determine if its points/cash back are easy to redeem, if you use its features, and if the customer service is good? Some of the best credit cards in Canada waive the first year annual fee to make switching a little easier for you. With so much fine print in the industry, a credit card company should have to earn our trust before we shell out a dime.

4. Downgrade Your Card

If you have a premium credit card and you find it’s not worth the annual fee, you may be able to ask for a downgrade to one of the credit card issuer’s no fee cards. You may not want to cancel the card, because you want to keep the credit line available for a rainy day, or you may simply want a no fee back-up card, in case your primary card gets lost, stolen, or frozen.

5. Cancel Your Card

If you’ve exhausted the above options and/or you’re confident that you can get the benefits you need from a no annual fee card, perhaps the time has come to cut your overpriced plastic to bits.

But take the following into consideration before you reach for the scissors: Cancelling a credit card may temporarily hurt your credit score because it increases your credit utilization ratio (total balances to credit line). However, if you’re cancelling a credit card and replacing it with a new card—particularly with a credit limit equal to or higher than the cancelled card—you should be fine. Moreover, credit utilization shouldn’t be as much of a factor overall if you’re diligently paying off your credit card balance each month.

To Fee or Not to Fee?

Instead of focusing on the fee that you’ll pay every year for a card, take a look at the benefits that you’ll get. Do those benefits outweigh the cost of the annual fee? If the answer is yes, then why not pay it? As long as you pay off your balance in full every month, having card benefits that are worth more than the annual fee is like getting free money. Factor in those signup bonuses and you’ll be scratching your head and wondering why you ever discriminated against cards with annual fees in the first place.

This post was not sponsored. The views and opinions expressed in this review are purely my own.

American Express is not responsible for maintaining or monitoring the accuracy of information on this website. For full details and current product information click the Apply now link. Conditions apply.

Author Bio

Barry Choi
Barry Choi is a personal finance and travel expert at MoneyWeHave.com. He has been quoted by media in Canada and the United States, including The Financial Post, The Toronto Star, Business Insider, The Globe and Mail, and has appeared on HuffPost Live. You can follow him on Twitter: @barrychoi

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