No Annual Fee Credit Cards

Many of the market’s best overall credit cards charge annual fees. And while that’s counterintuitive in the sense that no one would opt for a card with a fee over a no fee card if all else were equal, you have to remember that other factors are in play. In most cases, rewards are the explanation.

It doesn’t really make sense to pay a fee to use a 0% credit card, after all, since your goal in that situation is to reduce the cost of your debt. But paying a fee for one of the best rewards cards can help you get the most total value. It just depends on your spending habits and available options. You generally won’t qualify for rewards worth paying for until you have at least good credit.

So the moral of the story is that you can’t assume a no fee credit card is automatically better than a card with a fee. You have to compare the total package offered by each to see which is right for your particular needs.

When people talk about no fee credit cards, they usually mean those without annual and monthly membership fees. But some folks want more: a truly fee-free credit card, with no past-due fees, over-limit fees, balance-transfer fees or foreign-exchange fees, either. Cards lacking all such fees do indeed exist. The PenFed Promise Credit Card is one good example. However, there are two important things you need to understand about such offers:

First, if you need a card without over-limit and past-due fees, you shouldn't be looking for a credit card at all. The damage you’ll do to your credit by missing payments or maxing out your spending limit will surely outweigh whatever you save by avoiding fees for those offenses. This is especially true in the post-CARD Act era, as penalty fees can’t exceed the actions that trigger them. For example, if you spend $5 more than your allotted credit limit, the maximum fee would be $5.

Secondly, there’s no perfect credit card. Every offer has its fair share of pros and cons, and credit cards that lack fees entirely usually compensate by offering worse rewards or interest rates. That’s why credit cards without balance transfer fees have relatively high APRs, why rewards cards without fees tend to offer reduced earning rates, and so on.

The moral of the story is that you should compare credit card offers solely based on the features that will affect you most, given your spending and payment habits. After all, if you plan on using your card for rewards, why would you care if it has a balance transfer fee?

Picking a no annual fee credit card can be tough, seeing as they all have one major thing in common. But finding the best no annual fee credit card for your needs is simply a matter of deciding how you’re going to use it.

• If you want to lock your card in a drawer to build credit without being tempted to overspend, it doesn’t really matter which particular no-fee card you get.
• If you plan to make everyday purchases and pay your monthly bill in full, focus on finding rewards that suit your lifestyle. Most people should opt for cash back, but frequent travelers can score big-time savings from the best travel rewards cards.
• If you want to finance a big purchase or transfer a balance, look for the longest 0% intro period and, if applicable, watch out for transfer fees.

Credit card companies make money in a variety of different ways. This includes charging annual fees on many offers, sometimes in addition to monthly fees and certain one-time fees. But credit card companies also require merchants to pay so-called interchange fees whenever credit cards are swiped at their stores. Furthermore, card issuers assess interest on balances carried from month to month. And they charge for late payments and over-limit spending (if you opt-in for the ability to exceed your limit).

So as long as a customer actually uses his or her card, the issuer will have plenty of opportunities to make money, even if charging an annual fee isn’t one of them.

With that being said, a credit card company is bound to lose money on a no annual fee credit card that gets activated but goes unused. Because from mailing statements to operating a customer service department, there are many fixed costs associated with running a credit card program. That’s why credit card companies would prefer to always charge annual fees if they could get away with it. But competition and consumer demand make that impossible.

Yes, most credit cards with no annual fee do assess a foreign-transaction fee on purchases processed outside the U.S. But foreign fees are far less common among no annual fee cards than the general credit-card population.

More than a third of all no annual fee credit cards can also be classified as no foreign fee credit cards, according to WalletHub’s database of 1,000+ offers. But roughly 90% of all credit cards charge foreign fees.

More and more credit cards are either reducing or removing their foreign fees, as well. That’s why the average foreign-transaction fee has fallen by more than 20% since the beginning of 2011.

But it’s still worth finding a no foreign transaction fee credit card if you plan on traveling abroad or buying something from an international merchant. Doing so will save you about 2% compared to the average credit card, and it will allow you to get the best deal on currency conversion.