Does Paying an Annual Fee for a Credit Card Make Sense?

Laura Davey
by Laura Davey October 27, 2016 / No Comments

If you’re thinking about applying for a new credit card, one of the things you’ll notice is that some cards charge an annual fee. Many Canadians will automatically reject these from consideration, but should you?

Let’s look at when it does, and doesn’t, make sense to pay this charge.

When to choose a no fee credit card

The benefits of a no fee credit card are immediately obvious—you don’t need to pay to hold this type of credit card so there’s no outlay needed on your behalf.

Some scenarios when this would make sense are if you’re only intending to use your card for emergencies, or if you’re just looking to build your credit history, as your primary goal in using a credit card probably isn’t the rewards you’re getting back. Another circumstance where it makes sense to choose a credit card without an annual fee is if you don’t spend enough money each month to receive sufficient rewards to breakeven against the cost of the annual fee. In all these cases, a no fee credit card could represent a saving of around $99-$120 per year.

However, choosing a no fee credit card doesn’t mean that you can’t also get rewarded. For example, the BMO CashBack MasterCard offers 1% cash back across all spending categories and also comes with bonuses of up to $75 after your first purchases.

BMO CashBack Mastercard

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  • No annual fee
  • 1% cash back across all spending categories
  • Limited time: up to $75 cash back rewards

When it’s worth paying an annual fee for a credit card

It might seem counterintuitive, but paying for a credit card can often represent better value for money because they often come with better rewards.

If you’re looking to maximise your return, consider a rewards credit card, even if it comes with an annual fee. The most important factor is the net reward, as this determines the overall value of the card and tells you if it’s worth paying the charge.

So, if you spend a lot on gas and groceries, the Scotia Momentum® Visa Infinite Card is a great option since you earn 4% on those purchases. When you compare this to a no fee card which generally offers only a standard cash back of around 1%, you will likely get a higher net reward using this card. Additionally, for a limited time, the $99 annual fee is also being waived for the first year. However, if you don’t drive and or do much cooking at home, this card might not be the best fit since this card would essentially operate as a 1% cash back card which you could easily get permanently without a fee.

Scotia Momentum Visa Infinite

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  • Limited time: $99 first year annual fee waived
  • Earn up to 4% cash back on gas and groceries, 2% cash back on drug store purchases and recurring bill payments, and 1% cash back on all other purchases
  • Travel insurance benefits

Special offers can change the dynamic

Another thing to consider are special promotions. These can boost the net reward you’ll receive and can often counteract the annual fees. In fact, special offers for cards with an annual fee generally offer better bonus rates or welcome points, which can make them especially lucrative.

For example, the BMO World Elite MasterCard® is an excellent travel rewards credit card. As well as collecting points on your everyday spending, this card also currently has a great sign up bonus, worth $507 in rewards points and travel extras such as VIP Airport Lounge Access. The extra travel insurance benefits will also be particularly appealing for frequent flyers.

BMO World Elite MasterCard

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  • Annual fee of $150
  • Limited time: receive a sign-up bonus of 30,000 welcome points
  • Earn two BMO Rewards points for every $1 in credit card purchases
  • Best in-class travel insurance

However, no fee cards are also starting to get more competitive with their special offers. For example, for the first 6 months the SimplyCash Card from American Express offers 5% on gas, groceries and restaurants in Canada, and 1.25% after this. So, if you’re going to be spending a lot across these categories soon, the promotional period of this card could work well for you.

SimplyCash Card from American Express

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  • No annual fee
  • For the first six months, earn 5% cash back up to $250 on all eligible purchases at gas stations, grocery stores and restaurants in Canada
  • Earn 1.25% cash back on all other purchases once the Welcome Rate ends

The best credit card for you depends on your personal spending habits. Although it might seem complicated to try and work this out, luckily, we can do all the hard work for you! Try using our credit cards rewards calculator to compare the net rewards for different cards. Simply enter your spending habits for a typical month across categories like groceries, restaurants and travel and compare two or more cards side-by-side.

Whichever type of card you end up choosing—make sure it’s the one which offers the best deal for you!

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Flickr: Sean MacEntee