What is an annual fee?
Some credit cards charge you a fee to use their credit cards. It is paid annually and covers various charges or special services provided by the card. As the name implies, no annual fee cards provide their cards without a fee.
What is a no annual fee credit card?
As mentioned, there are many different credit cards, of which some charge an annual fee. These fees cover a number of special features from rewards programs to discounts or VIP status with various retailers and services. When you have a no annual fee credit card you do not pay a fee to use your card. However, it is important to remember other fees might apply such as a missed or late payment fee and you still pay interest for unpaid balances and cash advances.
How do no annual fee credit cards work?
No annual fee credit cards work the same way as other credit cards without having to pay a fee to use the card each year. You use it, in the same way, to make purchases or take cash advances and receive a statement with those transactions listed and tallied. You then can pay the balance or the minimum payment. For any balances carried you are charged interest, often with a higher interest rate for cash advances than purchases. You will also be charged other fees such as missed or late payment fees.
No annual fee credit cards advantages
For the most part, the reason Canadians choose to pay credit card fees is that it offers them access to what often proves to be measurable financial benefits. For example, these cards tend to offer rewards programs including cash back and travel rewards in hand with special offers not available to everyone. However, there are also no annual fee credit cards that do offer rewards including cash back. Here is the advantage of no annual fee credit cards:
- Often the rewards that come with fees don’t add up to as much as you hope when you deduct the fees paid
- You can use a no-fee credit card to help establish your credit history and credit score
- You have nothing to lose as you have not paid out any fees to use the card
- You can try the card out to see if it provides the value and convenience you are looking for
No annual fee credit cards drawbacks
The only drawback to annual fee credit cards is that you miss out on the features, loyalty programs and other special offers provided by cards with a fee. Of course, these drawbacks are based on what you desire in a credit card, as opposed to any disadvantages you would find across the board.
Who should get no annual fee credit cards?
Anyone can get a no annual fee credit card. However, those who benefit the most from these cards include:
- People who want a credit card they use rarely for basic things such as reservations or online orders
- People who mostly pay cash but want a credit card for the convenience to make larger purchases they can pay off over time
- People without a credit history who want to start building their credit score
Basically, these cards work well for people who don’t want to pay a fee, or who will not use the card often so, therefore, will waste money on fees.
How to choose a no annual fee credit cards
When choosing a no annual fee credit card consider the following:
Interest rates vary from card to card and determine how much additional money you will pay for any balance you carry. Therefore when choosing a no annual fee credit card you want to find the lowest interest rate if you feel you are likely to carry a balance. This will save you money. To get an idea of how interest rates and annual fees impact your balance, a typical scenario for a balance of $4000 paid off over a year can be compared as follows:
- On a card with a $0 annual fee and 21% interest, you pay an additional $472
- On a card with a $50 annual fee and 9% interest, you pay an additional $249 including the $50 fee
Although you pay an annual fee of $50 for the second card, your low interest rate saves you $273 in interest. So you really need to consider interest rates and determine if it is worth paying the annual fee for that lower interest rate.
Next look at the no annual fee credit cards with introductory offers. Often you can get a lower interest rate for a limited time. While this might sound good, if you feel you are likely to carry a balance beyond this limited time offer, the introductory offer will end, and your rates could go sky high. This ends up costing you more money in the end. Therefore consider:
- How long you will have the low interest rates
- What the special interest rate applies to
- Other conditions or fees
- What your standard interest rate becomes after the introductory rate
All of these things are important, but if you don’t intend to use the card often, finding a standard lower interest rate makes the most sense.
Rewards and Benefits
Although finding a no annual fee credit card with lots of rewards or benefits is possible, you will have less to consider when compared to cards with fees. However, there are options such as the AMEXSimply card which has no fees but offers cash back rewards, or the BMOCashback card that offers cash back on groceries and recurring bills. This can really help with savings over time, and when used for certain purchases and when paying your balance every month, you really can see some true benefits. To choose the right no annual fee credit card with rewards consider:
- If you need those benefits/rewards
- How much you have to spend to earn points or cash back
- Any restrictions that make it difficult to use the rewards
This can help you decide if the reward offers make sense for your needs.
As mentioned, although you aren’t being charged an annual fee, other fees can apply including:
- Cash advance fees
- Foreign currency charges
- Over-the-limit fees
- Reprinting charges for statements or receipts
- Dishonoured payment fees
- Inactive account fees
All fees must be considered before you sign on for the card.
If you prefer to mostly pay cash and won’t use your credit card often, then the no annual fee credit card is ideal for you. However, if you use a credit card often, you might find it better to pay a nominal fee so you can get more perks and rewards.
Are no annual fee credit cards totally free?
Yes and no. You do not pay an annual fee, but you do still pay interest on the unpaid balance. Some cards also charge:
- Foreign currency conversion rates
- Cash advance fees
- Higher interest on Cash Advances
- Dishonoured payment fees
- Over-Limit fees
You have to check each card to see what additional fees you might have to pay.
Is it worth paying an annual fee for a credit card?
It really is all about what you are willing to pay, what features you want and how your credit rating will affect the cards available to you. Some reasons people choose annual fee credit cards include:
- Having a poor credit score or limited credit
- Fees are offset by the rewards such as cash back
- Better introductory offers
- Travel points and rewards
- Other forms of loyalty programs to gain points to exchange for products, services, discounts, etc.
- Specialty features like VIP service and offers
It really is based on what you are looking for from your credit card.
Can you get a no annual fee credit card with bad credit?
Yes, there are no annual fee credit cards available for those with bad credit including:
Home Trust Secured Visa
This card requires you have a $500 deposit. The interest rate is 19.99% which is applied when you carry a balance. It is a secured credit card so if you use this card and pay off the balance on time each month it is an excellent way to improve your credit score. They do charge an inactive fee of $12 if you don’t use your card in 12 months, so always use it at least once a year. The basic terms are:
- Annual Fee: $0
- Interest rate: 19.99% on purchases
- Personal income required: $0
No-Fee Scotiabank Value Visa
This card requires applicants to earn at least $12,000 per year for approval. You also can’t have declared bankruptcy within the past seven years. Cards offer a minimum credit limit of $500 and also have a very good interest rate of just 12.99% on purchases. This is an unsecured card so is a good choice if you have a bad credit score. Watch for introductory offers when applying. The basic terms are:
- Annual Fee: $0
- Interest rate: 12.99% on purchases and balance transfers
- Personal income required: $12,000
These options can help rebuild your credit or build your credit history.