Should you use an Annual-Fee Card?

There are several types of credit cards out there including those that not only have a interest rate on debt owed but also come with an annual fee just to hold onto them.

However, the good ones often come with added benefits like cash back or flight miles. How do you figure out if you should get or continue to use an annual-fee card?

  1. First off, determine your spending habits and how much money you expect to leave as debt owed on the card for each month throughout the year.
  2. Use the interest rate of your annual-fee card and the interest rate of a regular no-fee card to calculate separate monthly finance charges. You can calculate this for each month or multiply by 12 if you believe your debt owed and monthly finance charges will remain relatively consistent throughout the year.
  3. Estimate the amount of money you expect to spend on the card that applies to cash back, flight miles, or whatever program the card is running.
  4. Figure out how much money you save or make back by using those special programs. For instance, if a card offers 2% cash back and you spend $10000 a year on the card then you would expect to get $200 back because you used the card.
  5. Subtract the annual-fee bonuses from the yearly interest and then add in the annual fee to find out how much it effectively costs to use the card. Then compare it to the finance charges of the regular card for an entire year. Some annual-fee cards have lower APRs as an incentive for heavy credit card users to use the card.
  6. You should now know roughly how much it really costs to use the annual-fee card versus the normal card. Is the annual-fee card effectively cheaper even though it has that annual fee attached? Are you such a light credit card user that the normal card is cheaper in-spite of the APR?

If you find out using this process that the annual-fee card is actually costing you more money in the long run, then you may want to consider dropping the card. You generally will have to pay off the card before you can put it behind you but it may save you some money in the long run.

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