Can an annual fee be a good deal?

Annual fees on credit cards are often seen as a downside to any credit card account, but there can be a good reason for an annual, or monthly, fee.

Credit cards cost money to run.  Keeping track of accounts, vetting borrowers and advancing money to consumers all cost money.  Credit card providers find various ways of getting this money back, and annual fees are for many borrowers actually one of the cheapest ways of paying for a credit card.  They are also one of the more honest ways of appreciating the cost.

Many specialized types of credit cards also come with annual fees.  Secured and prepaid credit cards almost all have annual or monthly fees, as do charge cards.  In the case of prepaid credit cards this is due to the interest foregone as prepaid credit cards are in fact cards that have money paid in advance and so have no chance to charge interest on credit balances that makes up a large share of the revenue of standard credit cards.

Charge cards and debit cards similarly do not have the ability to charge high interest as the balance is paid off every month and so are more likely to charge annual fees.  In the case of secured credit cards there are usually up front expenses involved in setting up the legal framework to allow for the security.  Concierge cards are usually sold to more wealthy clients. These offer plenty of extra services and part of the price is a reasonably high monthly fee.

Interest rates are one way that credit card providers recover expenses.  Interest rates for borrowers are usually high on most credit cards.  However, low interest credit cards, particularly to borrowers with a less than perfect credit rating or without a linked financial product, often come with an annual fee that offsets these low interest rates.

High advertised interest rates are not the only way of increasing of getting profits.  There are also grace periods during which interest is not charged, with short grace periods meaning that there more interest is charged.  Penalties, including penalty interest rates are also a popular way of getting revenue from credit cards, and these include “inactivity fees” which charge for the non-use of credit cards in a period, the unadvertised equivalent of a monthly fee.

The sorts of borrowers who would benefit from annual or monthly fees are credit card borrowers who have a small number of credit cards and a large interest balance.  As credit cards with annual fees tend to be more lenient with penalties and charges (although this should be checked) then borrowers who may have trouble making payments may also benefit from these cards.