Why do credit cards have annual fees?

Credit cards have annual fees to help cover the cost of rewards programs, benefits like travel insurance, and account services such as billing and customer support. Annual fees also help credit card companies profit more, especially on cards that people don’t use much. Also, in the case of credit cards for people with limited or bad credit, annual fees help credit card companies reduce the risk of lending to unproven borrowers.

The most common types of credit cards with annual fees are high-end rewards cards (especially the travel variety), business credit cards, credit cards for bad credit, and rewards cards for people with fair or limited credit. The more perks offered or the more risk there is for the issuer, the more likely there is to be an annual fee.

Here’s how credit card annual fees work:

Not all credit cards have annual fees. There are hundreds of no annual fee credit cards available. Also, some annual fees are a lot bigger than others. They can range from $25 to $550 and up, depending on the card. Some will also waive the fee for the first year. When a card does have an annual fee, that fee is automatically charged to your account once a year. The first fee will be charged to your first month’s credit card statement.

Whether or not a credit card has an annual fee, it shouldn’t be the only factor you consider when shopping for a card. That’s because whether an annual fee is worth paying depends on what you get in return and what other options are available. You can learn more below.

Key things to know about credit card annual fees:

• How are annual fees determined: Credit cards assess annual fees mainly to offset the cost of their benefits, rewards, and account services. But they’re also a way for credit card companies to make greater profits. Rewards cards, including airline and hotel cards, tend to have the highest annual fees. But their benefits are often worth it if you use the card frequently.
• Why issuers charge annual fees: The Credit CARD Act helps explain why credit cards charge annual fees. This policy limits penalty fees, over-limit fees, and APR increases but not annual fees.
• What cards charge annual fees: Some major credit card issuers don’t charge annual fees on any of their cards. Others charge fees on about half of their cards. Also, business credit cards are more likely to charge annual fees than personal credit cards.
• Average annual fee: The average credit card’s annual fee is $21.65, according to WalletHub’s Credit Card Landscape Report.

Whether or not you should have a credit card with an annual fee depends on your spending habits and credit standing. If you’ll save more with a card that charges a fee, it makes sense. But if you don’t plan to make a lot of purchases, a no annual fee card is probably the way to go.