Annual fees are the one aspect of a credit card that we all look to avoid. In fact, to some mile and point collectors, it is as big of a no-no as paying interest or late fees on a card. We have become spoiled by the existence of great sign-up bonuses that included the waiving of the annual fee for the first year. At the end of that first year, we have the moment of reckoning when we determine if we receive enough value from the card to retain it.
Annual Fees
Credit card annual fees are normally around the $80 – $100 area. There are some that exist on the lower end (like the Amex SPG card with the $65 annual fee) and then cards that are definitely at the higher end (like the Amex Platinum with the whopping $450 fee), but most are at an average of $90.
For the longest time, one of the benefits of signing up for a credit card is to have the annual fee waived. We were able to ignore that little item until the 11th month when we began to review what benefits we received from the card that justified our forking the annual fee over for another year of membership. It is the job of credit card companies to offer something that would be of value to keep you as a customer, but that value differs between cards.
Anniversary Bonuses
Some credit cards offer things like lounge passes, bonus miles, free nights, bonus points, companion tickets, and others when the annual feel comes due. Other cards actually do not offer anything of extra value to keep you paying an annual fee, but they do offer some benefits of the card. The annual fees help to offset those renewal bonuses. For the credit card company, they really do not care about the annual fee so much, that is why they will offer you those renewal perks or give a statement credit to wipe out the fee altogether. It is all about keeping you as a customer and encouraging you to continue to use their card so they can receive the transaction fees on your purchases.
Annual Fees Up Front?
Some credit cards have begun to eliminate the waiver of the annual fee on the first year. The US Airways from Barclaycard was probably the first noticeable one to do that. They used to give you 40,000 (or 50,000 miles) after just a single purchase and no annual fee on the first year. Now, after that first purchase and the payment of the annual fee you will receive those miles (currently at 40,000). That’s right, they moved the annual fee to the first month of membership instead of holding it off until the second year. Other cards like the Southwest cards have always kept that annual fee up front (the annual fees vary between the cards at either $69 or $99 per year).
The Chase Hyatt card used to have their $75 annual fee assessed up front but they have moved it to the second year. Other cards waive it for the first year but withhold part of the sign-up bonus until the second year, after the annual fee has been paid. Thankfully, the majority of our mile and points cards hold off the annual fee until the second year, though.
Assessing the Annual Fee Up Front
There are exceptions that are starting to pop up. One big on is the current Chase Ink Plus offering. The offer is normally 50,000 points (after spending $5,000 in 3 months) and the annual fee is waived for the first year. However, they bumped that bonus up to 70,000 points (also after spending $5,000 in 3 months) but they have the annual fee up front. There are many people that are avoiding this offer because of that. Their argument is that they can purchase gift cards at office stores and earn 5 points per dollar and it will cost them much less than $95 to manufacture that extra 20,000 (which would require spending $4,000 at office supply stores for the 5x points). While that is true, some people would just rather pay the annual fee and not have to deal with liquidating those gift cards, which I understand as well. But still, that annual fee of $95 is clearly helping to offset the extra 20,000 points that they are giving with this offer. It would peg their internal value at less than .5 a cent per point, which would be a fair valuation for themselves.
Changing Offers And How to Pay For Them
Credit card sign-up bonuses used to be tremendously easy – sign-up and receive the miles or use it for one purchase to receive the miles. Some co-branded cards had spending requirements, but they were on the very low side. Eventually, credit card issuers began adding to the minimum spend, most likely in an effort to offset the sign-up bonus as more and more people signed up. The recent mentions over the last couple of years are the Chase Sapphire Preferred (went to $3,000 from $1,000), the Barclaycard Arrival Plus (went to $3,000 from $1,000), and the Chase Hyatt card (went to $1,000 from first purchase).
Fortunately for us, the opposite has also occurred. We have seen the Chase Ink Bold/Plus cards go from requiring $10,000 in spending to receive the bonus to only $5,000 in spend. That was a great shift! But, maybe it was a great shift for Chase as well if they begin to put the annual fee up front. Here’s why – Chase actually makes more from the annual fee of $95 than the merchant charges on $5,000 of spend! For Chase, it makes them extra money easily with the annual fee so they are able to lower the minimum spending for us.
I think more issuers will be leveraging their annual fees and begin putting them up front. It is a great way to subsidize their sign-up bonuses and to ensure customer loyalty throughout the first year. At this point in the credit card timetable, loyalty is everything to the issuer. If they can keep customers longer, the better off they are. By assessing the annual fee up front, it gives the customer less of an incentive to cancel the card within a few months since they have already paid for the first year. And, of course, it helps to pay for that nice sign-up bonus we all enjoy.
If issuers do begin to move that way, will that make me stop applying for credit cards? Absolutely not! How many people have signed up for the Southwest Airlines cards alone? It will just take a different mindset when we apply. Instead of looking at an offer with the sign-up bonus and seeing $X00 in value, we now deduct that amount by the annual fee. Or, we can simply look at the offers we have received over the years as being worth $X00 in value + the value of the annual fee being waived. Either way, if the offer is good enough, the annual fee being required up front will not deter me from applying for it.
What about you? If it becomes a trend to move the annual fee to the first year, will that make you not apply or will you just be more selective with your applications?
