Annual Fees and Canceling Cards

June 1st, 2020

No one likes annual fees. But we like to think of the annual fees on credit cards like income tax -- no one likes it, but you don't decide which job you take based on being taxed. Stick with us for a second on this one.

I hate paying taxes, so please pay me less

If someone told you tomorrow, “I’ve got a terrific job for you. It pays a salary of $15,000 -- and the great news is, the pay is so low, you don’t have to pay a penny in income tax!”

Now, someone else offers you $70,000 for the exact same job -- but guess what? -- you’re going to end up paying $9,500 in income taxes.

Would anyone in their right mind say, “I hate paying taxes, so just give me the lower pay.” And yet, that is what people do all the time with annual fees on credit cards.

Most cards we recommend will give you bonus values over $700 for a first year annual fee of $95. (Most cards with no fee max out around $150 bonus.) By the way, your accountant will probably advise you that your points are not taxable, so no double taxation.

So an annual fee doesn't likely impact your decision to get a card. However, the annual fee become relevant if you keep the card after a year. So here are a few guidelines:

Start with cards you are most likely to keep

• This will help improve your relationship with the banks and your credit
• Some examples of worthwhile annual fee benefits:
  • Chase Sapphire because it will be the hub of your flexibility
  • Marriot and Hyatt cards because you receive a free room annually
  • Southwest or Delta cards that offer points or passes annually

When possible, downgrade rather than canceling the card

• Chase Sapphire and Amex Platinum are two examples of cards that can be downgraded to a non-fee card
• This retains your good relationship with the bank and keeps the age of your credit

Keep cards for at least 10 months, and make the cancellation decision as the fee approaches

• Again keeping you from damaging your relationship with the bank
• Our tool will remind you at the 10-month mark, so you can make your decision prior to being charged the annual fee
• It’s also worth a phone call to see if they’ll waive the annual fee

At the end of the day, canceling a credit card is really easy, and not damaging to your relationship with the bank if it is done properly. Our tool will help you navigate those decisions.