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.
Like me, many Canadians are repulsed by annual fees charged by credit cards. But over time as my financial savvy grew, my perspective changed. Now I realize that it doesn’t matter if your credit card’s annual fee is $29 or $699 — sometimes the benefits offered far outweigh this annual 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.
So, does paying an annual fee make sense for you personally? I can help. By understanding the circumstances in which paying an annual fee for a credit card may be worthwhile and the circumstances in which it’s a waste of money, you can select the right card for your needs. (Of course, if you want to cut to the chase and compare credit cards, consider using the free and fast Money.ca credit card comparison tool.)
When does a credit card annual fee makes sense?
When the insurance benefits outweigh the fee
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 these coverages individually from an insurance provider can easily surpass the $150 annual fee (which is a common annual fee among premium credit cards). For example, a basic emergency medical plan for a week-long trip outside Canada can cost $35 to $75 per person — and that’s just one type of coverage. Annual multi-trip insurance plans often run more than $200. By bundling these benefits into your credit card, and paying the one annual fee, you can save hundreds every year.
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.
It’s not just about travel insurance
Many premium cards also provide very valuable coverage for items you purchase as well, in the form of extended manufacturer’s warranty and purchase protection (which covers loss or theft within 90 to 180 days); mobile device insurance; and price protection (which pays the difference of a price drop within 60 days).
When the sign-up bonus is huge
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% to 10% back on every eligible purchase you make for the first three to four months after you get the card, which can add up to $100 to $200 or more 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
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 another card for most everyday purchases, does it still make sense to keep your annual fee credit card? In many cases the answer is yes.
With a travel rewards card you often get additional perks that can quickly add up. For example:
- Airport lounge access or passes
- Annual companion tickets
- Roadside assistance
- Free hotel nights or upgrades
- Waived foreign transaction fees
- Point transferability to other rewards programs
A card that renews those perks every year offers evergreen value — enough to justify a high annual fee. For example, the RBC® British Airways Visa Infinite offers a free companion flight on British Airways (or 50% a single ticket), each year. The Scotiabank Passport® Visa Infinite Card comes with complimentary Visa Airport Companion Program membership as well as six free airport lounge passes each year.
What is the best credit card in Canada? It might be the RBC® British Airways Visa Infinite, with a $1,176 first-year value. Compare more than 140 cards in just 5 seconds.
When you spend big and take advantage of a high earn rate
According to the latest data from Statistics Canada, the average household now spends about $8,200 annually on groceries, $3,600 on dining out, and $2,300 on gasoline. That’s over $14,000 in spending that could be earning significant rewards if routed through a card with a high earn rate — especially one that offers bonus multipliers on everyday categories. To make your dollars work harder — upgrade your credit card today.
When does an annual fee credit card not 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, 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 perks and benefits 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 annual fee cards and start credit card shopping for a new no-fee card.
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 credit card) that skips the annual fee — at least until you’ve paid off all your credit card debt and your spending is in check.
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. To save money, consider bundling a premium bank account with a premium credit card — you may not eliminate all fees, but if you shop smart you could dramatically reduce the annual fees paid for these financial products and walk away with some useful perks and benefits.
For instance, RBC’s Signature No Limit Banking plan can offset the cost of one credit card annually if you meet balance or transaction requirements. Similarly, Scotiabank’s Ultimate Package covers the fee for select cards — meaning you get all the perks, without the price tag.
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.
That said if you’re not sure your annual fee card is pulling its weight, use the fast and free Money.ca credit card comparison tool to quickly compare your best card options. See how your rewards, perks, and insurance coverage compare to other top-rated credit cards in Canada. You might be surprised how much value you’re leaving on the table.
Sources
1. Statistics Canada: Household spending by household tenure
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.