You're a responsible credit card user. You live within your means and pay your balances in full each month.
It's likely you even have several credit cards in your wallet, although the majority of your monthly expenses are charged to the one that helps you bank the most rewards. As for the other cards, you keep them active to help boost your credit score and serve as backup in case of emergency.
What's wrong with that? Well, in the past you had little to worry about. But times have changed.
Cardholders just like you are receiving notifications across the country of new annual fees for credit cards that have always been considered "free" to use. At least, in regards to their lack of an annual fee.
Major credit issuers, caught in a firestorm of delinquencies, stricter financial regulations, and shrinking revenues, appear to be once again turning in force to the almighty annual fee as they search for ways to replace lost income and improve top-line growth. And while some consumers prefer these "in your face" fees over those that hide deep within the fine print of cardholder agreements, others consider them a big slap in the face.
The truth is paying an annual fee isn't necessarily a bad move for all consumers. In fact, for many credit card users the benefits far outweigh the disadvantages.
So, what should you do if your credit issuer surprises you with a new annual fee or an increase in what you're already paying? Here are three steps to take before deciding whether to pay up or move on to a new card:
Step 1: Bust out the trusty HP and exercise your math skills
Your basic goal should be to determine whether the estimated value of the rewards you'll earn exceeds the fee. To get started, determine your plan of attack based upon what type of rewards you currently receive.
If the card in question is a cash back credit card, it should be fairly easy to mathematically determine whether it's worth paying the annual fee. Simply estimate your annual expenses, perform some multiplication and addition, and you'll soon arrive at a number that's either smaller or greater than the annual fee.
On the other hand, if you receive airline miles or some other form of reward, the task may not be so easy. Airline miles in particular can be difficult to value as there can be a great deal of restrictions and variations in rewards programs.
Still, if you're a mathematical whiz and can figure out a way to determine a conservative value for your rewards, then by all means do it and write us to share your method with others.
If you don't receive any rewards for the card, then Step 1 becomes more of a subjective task. You essentially need to determine if paying the fee is worth it to keep the open credit line and retain a higher credit utilization ratio. In many cases, the answer is likely "no". But there's more to come on this in Step 3.
Lastly, it's important to remember that some credit issuers are refunding the entire annual fee if you spend more than a certain amount each year. Keep that in mind as you compare credit card offers and read the fine print.
Step 2: Pick up the phone and make a fuss
You should now have a better understanding of whether it makes mathematical sense to pay the new annual fee. But regardless of the outcome, it's time to make some calls to your credit issuer while crossing as many fingers and toes as possible.
If you have a solid credit history and have been a good customer, you've got a head start over others - now is the time to flaunt it. Make your way through the first few levels of customer service representatives who lack the authority to do much of anything, get a supervisor on the line, and then plead your case with all your might for why they should waive the fee and keep your business.
If you never use the card, this might be a long shot, but it's still worth the 10-15 minutes of your time. You just never know the response you'll get. There are plenty of cardholders out there who have never paid an annual fee for a rewards card simply because they always call and ask that it be waived. It works.
Step 3: Prepare your best impression of David Spade's "Buh-Bye"
Or Helen Hunt's version, whichever you prefer.
The point is you have every right to waive a "snobby" goodbye and close your account if the math doesn't make sense and your credit issuer won't waive the fee. However, there are a few things you should consider first.
If you choose to close your card and take your business elsewhere, your credit score may take a hit since both your credit utilization and length of credit history could be negatively affected. These two factors alone make up almost half of your FICO score, so they shouldn't be ignored.
Of course, that may be of no concern if you have plenty of available credit, older credit cards on hand, and no reason to seek financing for a home or car in the near future. So, if you can afford the potential credit hit and have no need for the open line of credit, then go right ahead and hit them with your best "buh-bye". Enjoy every minute of it!
On the other hand, paying the annual fee to retain an open line of credit and maintain your current credit scores may be the right choice- even if you don't plan to use the card much at all. That's just a financial judgment call you'll have to make.
If you're applying for a home loan next month and a drop in your credit score could result in missing out on the best interest rate available, it's going to cost you a lot more than a $60 annual fee over the next thirty years. It will cost you thousands! So, it might be a bit painful to pay up at the moment, but you will more than make up for your sacrifice in the future.
