Credit cards are our best friend. They increase our spending power and are insanely convenient to have. However, once a year, many cards have an annual fee that is automatically charged. This is the price to pay for all the benefits that come with that credit card. Generally, the higher the annual fee, the more benefits the card provides. Here’s what you need to know about credit card annual fees.
Why do credit cards charge you an annual fee?
The annual fee covers the administrative costs of maintaining your credit card account. For example, if you ever need to replace your card if it’s lost, stolen, or damaged, you will be able to get a new one immediately.
How is the fee charged?
The annual fee may be a one-time charge on your credit card, usually around your card’s anniversary or at the beginning of the calendar year. Some credit cards will divide up the annual fee and charge it monthly. However, it is much more common for cards to charge the annual fee annually.
When is the annual fee worth it?
Credit cards with annual fees usually offer much bigger rewards. Many times, big spenders find this fee worthwhile because they earn enough rewards to outweigh it. Let’s take a look at a few reward categories by analyzing them against a sample credit card. For our comparison, we will look at the OCBC 365 Credit Card.
Consider the sign-up bonus
At the time this article was written, OCBC was offering S$88 cash back for just applying for the card. If you spent S$800 within the first month, you would get an additional S$80 cash back. That’s a welcome bonus of $S168.
Consider your own everyday spending
This credit card offers 6% cash back on dining, 3% cash back on groceries, 3% cash back on land transport (such as taxis), 5% on all petrol service stations, up to 23% fuel savings at Caltex, 3% on recurring telco bills and recurring electricity bills, 3% on online travel bookings, and 0.3% on EZ-Link and TransitLink transactions. If you are like me, I charge all my expenses to my credit card. I love the convenience of paying my bills online, shopping online, as well as charging my dining bill and groceries. These are quite a few diversified categories that help build up to the sweet “spending” spot. This card is ideal for spenders who charge a minimum of S$800 a month. I would advise you to take a look at your expenses and break them down into categories to know how much you spend in each. Then, you can calculate approximately how much cash back you would get monthly. For example, a survey conducted in 2013 determined that Singaporeans spent S$248 a month dining out. This would yield S$14.88 in cash back.
Consider categories that match your spending habits
Some cards offer rotating bonus categories. However, the OCBC 365 Credit Card is renowned for dining out. This is the highest reward rate for the card. Therefore, if your largest expense is at restaurants or food delivery, this is the card for you. The idea is to identify what you spend the most on and find a card that gives you high bonuses or rewards for that category. The goal is for the annual fee to essentially pay for itself.
Consider ancillary benefits and services
These are the extra perks that come with the card, such as airport lounge access or free checked bags. OCBC 365 offers complimentary travel insurance of up to S$500,000 and Visa Signature privileges. With this credit card, you can take advantage of Visa Concierge Services available 24 hours a day, complimentary upgrades at participating Visa luxury hotels, and even movie ticket offers when you use Visa Checkout online.
How to avoid an annual fee?
Ideally, a consumer would want to get avoid the annual fee entirely. This is possible when banks incentivize you to pay your annual fee, and in exchange, you earn air miles. For example, the DBS Altitude Visa Signature Card offers you 10,000 air miles for paying your annual fee.
Another option is to have your annual fee waived. For example, the OCBC 365 Credit Card has an annual fee of S$192.60 a year. To earn the fee waiver, you must spend a minimum of S$10,000 in one year, starting from the month after your OCBC 365 Credit Card was issued. As a result, if you spend at least S$834 a month, you’re golden!
Additionally, you can simply call your bank. Approximately 90% of customers that call a bank’s hotline are requesting to have their credit card annual fee waived. In fact, some banks even have an automated fee waiver system built into their telephone banking. Of course, there is no guarantee as to whether or not your bank will waive your fee. Often times, they have an algorithm to determine which customers they will approve the waiver for.
If all else fails and you are still not willing to pay the annual fee, you always have the option to close your account. However, a word of caution. Canceling a credit card can temporarily negatively affect your credit score. Therefore, if you are planning on applying for a major loan sometime in the near future, it might be worth paying the annual fee to protect your credit history. On the other hand, if you are ready to close your account, make sure to redeem all reward points and cash back rebates you can, as well as, changing any recurring payments you have associated with your credit cards.
Paying an annual fee is not necessarily a bad thing. Make sure that the benefits of the card make it worth paying the fee. Hopefully, you can get the fee waived to get the best of both worlds!