When is it worth paying the credit card annual fee?
Credit cards with reward points, extra features and low-interest rates that outweigh the cost of the annual fee.
Credit card annual fees can range from $0 to hundreds (and sometimes into the thousands) of dollars. While no one wants to pay this extra charge, sometimes forking out for a credit card annual fee helps you get more value when you’re spending on plastic. The trick is to find a credit card that offers extra features, eg reward points offers or low-interest rate deals that provide monetary value to help outweigh the cost of the annual fee.
To give you some ideas, we’ve highlighted a handful of credit card features where it may be worth paying an annual fee.
Which credit card features help justify paying an annual fee?
Picking up points as you spend is an undeniable perk of an Airpoints credit card, but it usually comes at the price of a high annual fee. However, significant bonus point offers could be the key to offsetting these costs.
For example, the American Express Airpoints Platinum card comes with 200 bonus Airpoints Dollars. The card has a $195 annual fee, but once you receive approval, you need to spend in the first three months to qualify for the Dollars.
However, let’s assume you’re already planning to spend or more over three months, can the bonus points help outweigh the credit card annual fee? We’ll use the example of redeeming points for flights to find out.
Flight rewards are subject to availability, but you could redeem a return flight with Air New Zealand from Auckland to Christchurch (valued at $90) for 90 Airpoints. Maybe you not sure what time you are flying home, you could book a flexitime seat from Auckland to Christchurch for 125 Airpoints (monetary value $125). So, you can easily use those 200 points you receive with the American Express Airpoints Platinum card to offset the annual card fee.
Competitive 0% balance transfer offers
If you apply for an interest-free balance transfer offer, the last thing you want is an expensive annual fee that counteracts the interest you save. Annual fees can range from $0 (for a promotional period) to as high as $150 across 0% balance transfer cards. The key is finding a card with a 0% balance transfer offer that offers interest savings that outweigh the cost of the annual fee.
For example, the BNZ Low Rate Mastercard comes with 0% on balance transfers for 12 months and an annual fee of $35 p.a. If you have a credit card debt of $5,000, on a card with a standard interest rate of 13.95% and then you transfer the debt to the BNZ Low Rate Mastercard, you could save $697.44 p.a. in interest over the 12-month interest-free period. If you deduct the $35 annual fee, this still brings your total savings to approximately $662.44.
Please remember that some credit cards charge a fee for the balance transfer, so you will need to factor this into your calculations.
While platinum credit cards come with a higher annual fee, the lineup of additional features can help you get more bang for your buck.
For example, the American Express Airpoints Platinum credit card is a card that offers a smorgasbord of extra features for an annual fee of $195.
You can save $255 on the Koru joining fee and $145 per year on the annual fee, for however long you hold the credit card. This card also comes with two complimentary passes to VIP lounges with “Priority Pass”, including the Strata Lounge at Auckland International Airport. For a standard pass this usually costs US$99 annually, with a one-off charge of $27 when you access the lounge.
If you’re interested in non-travel-related perks, you can also look forward to a Smartphone screen insurance of up to $500 for smartphone screen repairs, if you purchase the Smartphone outright using your Amex card or use it to pay the Smartphone contract or SIM only plan each month.
Without even considering the 200 bonus Airpoints Dollars, these perks give you $1,072 worth of extra value (or $877 if you deduct the annual fee). As long as you take advantage of the additional features that come with your plastic, there are ways to justify paying a higher yearly fee if you opt for a platinum credit card.
Low purchase rates
If you struggle to repay your balance in full each month, a card with a low-interest rate could help you cut back on costs. However, it is only worth it if the credit card annual fee doesn’t outweigh your interest savings.
The Kiwibank Low Rate Mastercard offers a low ongoing interest rate of 9.95% p.a., and comes with an bi-annual account fee of $15 p.a. While this is a reasonably competitive yearly fee, your interest savings need to exceed this amount for the card to offer any value. Let’s compare this to a card that offers a $0 annual fee but has a higher purchase rate of 20.74% p.a.
Let’s say you have a credit card debt of around $3,000 and you can afford to allocate $250 to pay off your debt each statement period. With a no annual fee card, with a higher interest rate, it will cost you $326 in interest and take you a year and two months to repay your debt. Meanwhile, with the Kiwibank Low Rate Mastercard, you will pay $198 in interest and clear the debt in a year and one month. So, even with the $15 bi-annual fee, the lower interest rate of the Kiwibank Low Rate Mastercard offers more value in this instance.
Exactly how much you can save depends on the size of your debt and how much you repay each month. However, a card with a low-interest rate and an annual fee could still offer more value if you want to save on interest costs.
So, there you have it. When you’re looking for your next credit card, keep an eye out for extra features, competitive interest rates or reward points that help you justify forking out for a yearly fee. Otherwise, if you’re dead set on a no-frills card, you can compare ones with no annual fee here.
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