Annual Credit Card Fees: Good Or Bad?

It may be cheaper to pay an annual fee if the interest rate on your card is low enough. Annual fees generally range from $20 to $75. To decide, you need to calculate which is cheaper: a fee-based card with a low interest rate, or a no-fee card with a higher interest rate.

Let's look at two cards. The first card has a $25 annual fee and a simple interest rate of 13%. The second card has no annual fee and an interest rate of 15%. If you pay your balances in full every month, you pay no interest. If you are thrifty enough to have no monthly balances, the no-fee card is clearly the better deal.

However, if your average monthly balance is $5,000, the no-fee card would cost you an extra $100 ($750 - $650) a year in interest:

In this case, paying a $25 annual fee is the better deal. You save $75 ($100 in interest minus the annual fee) a year. If your average monthly balance is $10,000, the fee-based card would save you $175 a year.

There are other fees to watch for. Credit card companies routinely charge fees on cash advances. These fees are usually imposed at the card's ceiling rate. There is seldom, if ever, a grace period on cash advances. This means you begin paying interest on those amounts immediately.

Card companies also charge hefty fees on any charges that temporarily exceed the amount you are allowed to borrow. Like cash-advance fees, these are fees that you pay for the privilege of having access to credit that is more than your borrowing limit. These kinds of charges should be avoided, if at all possible.