Choose a credit card that complements your spending patterns within your budget – and check what you are getting in return when you pay its annual fee.
So you come across a credit card which you think will enrich your lifestyle with its host of benefits. However, just when you’re about to apply for it, you notice a particular rider that dampens your mood: the credit card charges an annual fee. Sounds relatable? Well, to be frank, nobody likes paying credit card annual fees. But just because a card charges a renewal fee, should you instantly discard that option? The answer is not that straightforward.
The fact remains there are several great credit cards out there and the annual fee is the price you need to pay to avail their attractive benefits and privileges like complementary air miles, free travel insurance cover and exclusives discounts. On the other hand, there is no paucity of zero annual-fee cards, but they mostly come with only basic facilities. So, how should you arrive at a decision when a credit card you like charges an annual fee? We’ve discussed a few pointers which you should find useful.
Check if you get something extra in return for paying the annual fee
You should ideally sign up for a credit card with an annual fee if you get something worthwhile in return. These perks could be in the form of signup benefits or additional reward points, among other privileges. After doing a cost-benefit analysis, you might realise that you’ll have to pay a lot more than the upfront fee charged if you were to avail the same benefits from your pocket. For example, let’s suppose your preferred travel credit card offers 10,000 bonus air miles when you pay the annual fee of Rs 2,000. Assume you’ll get ticket discounts worth Rs 6,000 when you redeem these 10,000 bonus miles. Now, if you do the calculation, you’ll see that accumulating 10,000 air miles would require expenses worth Rs 20,000 charged to the card. So, paying just Rs 2,000 as the annual fee isn’t a bad deal, right?
Let’s take another example. Suppose there are two cashback credit cards — Card A doesn’t charge an annual fee and Card B charges an annual fee of Rs 1,000. Card A gives up to 5% cashback capped at Rs 100 a month every time you buy groceries at a particular supermarket. Card B, on the other hand, gives 10% unlimited cashback when you buy groceries at any of the 10 partnering supermarkets. As such, if your monthly budget for groceries is Rs 5,000, you’ll save a maximum of Rs 100 a month with Card A (due to the predefined capping) if you buy all your grocery from the sole partnering supermarket. The annual savings, thus, could be (Rs 100 x 12) Rs 1,200. Now, Card B will get you 10% cashback worth Rs 500 a month or (Rs 500 x 12) Rs 6,000 a year with more options in terms of partnering supermarkets. And net yearly savings would be R 5,000 if you deduct the annual fee of Rs 1,000. Also, Card B gives you more flexibility in terms of supermarkets where you’d be able to avail the cashback benefits.
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Now let’s say you stay alone and do not spend more than Rs 1,000 a month in groceries. Card A’s 5% cashback will help you save (5% of Rs 1,000) Rs 50 a month or (Rs 50 x 12) Rs 600 a year. What’s better is that you don’t need to spend anything else as annual fee to avail this benefit. But Card B’s 10% cashback would mean (10% of Rs. 1,000) Rs 100 as monthly savings and (Rs. 100 x 12) Rs 1,200 as yearly savings – but you also need to shell out Rs 1,000 as an annual fee to use it. So, net yearly savings is just (Rs. 1,200 – Rs. 1,000) Rs 200 which is Rs 400 less than what Card A will let you save. The only thing, however, to keep in mind would be that you need to shop only at the supermarket which has a partnership with Card A.
The key lies in matching your unique requirements and budget with the card benefits
Every card user has a different credit card spending pattern. Some use it frequently to buy groceries while others use it more to book flight tickets. Your card use depends on your lifestyle. It is essential to identify your priority spending areas while keeping a check on your budget when you’re trying to decide upon a particular credit card. This would help in choosing a card whose benefits and privileges complement your priority card spends. Like if you’re a frequent flyer, you will benefit using a travel credit card more than, say, a card that gives 10x reward points when you buy movie tickets. You should consider paying the annual fee for the travel credit card if you stand to gain a lot more in terms of travel benefits if you use it to book your flight tickets.
Then comes the all-important consideration of affordability. If you think an annual fee of, say, Rs 3,000 puts an avoidable strain on your budget, you should definitely opt for a card that charges less in annual fee or doesn’t charge anything at all. The same rule applies if you feel that the annual fee, coupled with the amount you need to spend to avail maximum card benefits, exceeds your budget. Because credit cards are great spending tools only when you can clear your bills in full on time every month. Any laxity would lead to steep interest charges (as much as 40% p.a.), unnecessary debt accumulation, no interest-free periods and an impacted credit score.
As such, annual fees shouldn’t be the only consideration while going for a credit card. You must first select a card category that is aligned with your spending patterns (like travel credit card, grocery credit card, etc.), and then shortlist options in that category which allow you to avail maximum benefits without exceeding your budget. Then there are other essential eligibility criteria that you need to fulfil to ensure your card application gets approved, like minimum income requirement, income stability and a good credit score, among others. If you miss out on any of these, it’s unlikely you’ll get the card in any case.
Lastly, if you’ve selected a card that’s aligned with your budget and spending patterns, but you think the annual fee is on the higher side, you can always reach to your bank and request a fee waiver. They might agree to your request or give a discount on the annual fee or offer another zero annual fee card variant, depending upon the relationship you have with them. At times, credit cards come with a conditional annual fee, i.e. you need to spend a predefined amount on the card in a year to get the fee waiver. If the minimum spending requirement is within your budget, you won’t have to pay an annual fee.
In conclusion, your spending habits, income and budget should be the primary considerations while selecting a credit card. If your chosen card charges an annual fee, you need to figure out whether it’s worth paying it after carefully factoring in its benefits and perks. This might involve some research at your end, but you stand to gain a lot in terms of maximizing your savings if you tick these boxes. It’s also advisable to compare different credit card options based on your eligibility and preferred spending areas to make finding the perfect match that much easier.
(The author is CEO, BankBazaar.com)