According to a 2014 Gallup poll, Americans who own credit cards have an average of about four cards. And while 64 percent of Americans always or usually pay their full balance each month and avoid paying interest, it’s not just interest that you should consider when opening a credit card.
You should also think about annual fees. While not all credit cards have annual fees, those that do often offer more rewards.
If you opt for a credit card with an annual fee, be sure that the rewards you receive with the card make up for it. Keep in mind that the credit card offers made to you may depend on your credit worthiness, with a higher credit score indicating a lower credit risk to lenders.
As you consider a card with an annual fee, here are four questions you need to answer about the rewards it offers.
1. Do the rewards match your spending patterns?
Spend some time thinking about what type of rewards you’d take advantage of the most. If you spend a lot of time driving, for example, a card that offers gas rewards might work for you. If you fly frequently, you may want to consider a card offering airline miles. If there is a specific airline you fly the majority of the time, check out airline-branded credit cards, which often feature excellent perks.
While some credit cards offer a big sign-up bonus, they may require that you spend a certain amount within the first three months of opening your account. But if the card matches your spending patterns, you may be able to earn the bonus because you’re using it for things you’d purchase anyway.
2. Is the rewards program easy to understand and use?
It’s very important to understand a credit card’s rewards program because if you don’t, you won’t be able to make the most of it. For instance, some cards offer tiered rewards, which require users to spend more to increase the percentage of their rewards, such as 0.25 percent cash back for the first $1,000 in spending, 0.5 percent for the next $1,000, and 1 percent for all spending greater than $2,000. Some cards also have caps on how much you can earn in a certain category.
If you find the rewards program difficult to understand or you can’t find an explanation of the entire rewards program online, then call the issuer and ask questions before you apply for the card.
3. Are the rewards exceptional?
As you’re shopping for a rewards credit card, your goal is both to get the card that’s best suited to you and also to maximize the rewards you can earn. Use credit card comparison websites to look at the rewards for the type of card you want. If you want cash back, for example, see which card offers the best rewards and the best annual percentage rate (APR). Note that cash back cards with annual fees may offer a better deal than cash back cards without annual fees.
When it comes to comparing airline miles cards with annual fees, you should also consider perks such as waived baggage fees, priority boarding, and airport lounge access. Basically, the higher the annual fee, the more rewards and advantages you should expect.
4. Are there any hidden fees?
With travel rewards cards, be aware of additional charges like booking fees, inactivity penalties (such as losing rewards for not using the card), and baggage fees. Some of the best cards waive baggage fees—with restrictions. For example, if the reservation is in your name, these fees might be waived on the first bag for a certain number of people in your traveling party, but an authorized user on your account may not get the baggage fee waived even if he or she uses the card to make the reservation.
To know if a card is worth the annual fee, you have to carefully read the fine print for its rewards program. If you’re confident that the card is a good fit for you, then consider applying for it. As always, be sure to pay your credit card bills on time— your payment history makes up 35 percent of your credit score.
Beverly Harzog is a nationally recognized credit card expert, consumer advocate, and the author of Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made. She runs a popular credit card blog on her website, www.BeverlyHarzog.com.
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