With more and more credit-card issuers introducing annual fees, we assess whether paying a fee adds up.
Credit-card companies have been feeling the squeeze lately, and are responding by introducing annual fees for some (or all) of their cardholders.
In response to rising bad debts and the Office of Fair Trading's crackdown on unfair penalty fees, the providers of credit cards are scouting around for ways to maintain their fat profit margins. In general, they fall back on these two easy options:
- First, they can increase their interest rates. A typical credit card now charges an annual interest rate of around 16.5% APR, which is a juicy eleven percentage points above the Bank of England's base rate of 5.5% a year.
- Second, they can introduce (or reintroduce) annual fees, which were widespread in the Eighties but pretty much died out in the Nineties.
As I warned last week in Barclaycard Customers Face More Fees, Barclaycard plans to introduce a £20-a-year low-usage fee, following the lead of Lloyds TSB, which introduced a similar 'dormancy' penalty of £35 in February. However, these penalty fees are aimed at a relatively small proportion of credit-card customers. Thus, the big money is to be made by charging all cardholders an annual fee, rather than just a select few.
Generally speaking, paying an annual fee usually gives you access to cheaper interest rates or a package of benefits, incentives and add-ons. However, I'm sceptical as to the true value of these product bundles -- for example, I've criticised packaged current accounts several times in the past.
Indeed, as a cynical former banker, I know that banks introduce these paid-for packages for one reason, and one reason only: to improve their profits. Hence, while some customers value and make full use of these bundled services, as a whole, these packages cost more than they are worth.
Then again, you may find that some of the benefits on offer are right up your street, so let's take a look at what paying an annual fee for a credit card gets you nowadays:
Card | Minimum annual income (£) | Annual fee (£) | Benefits |
|---|---|---|---|
Citi AAdvantage Gold Visa | 20,000 | 25 (none in year one) | Worldwide travel insurance; baggage loss (up to £500); flight delay (up to £500); one-year year extended appliance warranty; medical cover and free purchase protection. |
Co-operative Bank Gold Base Rate Visa | 15,000 | 120 | Free independent financial advice; discounts on holidays booked via the Co-operative Visa Travel Club; and £100k of travel accident insurance. |
Co-operative Bank Platinum Tracker Visa | 25,000 | 24 | Free independent financial advice; discounts on holidays booked via the Co-operative Visa Travel Club; and £100k of travel accident insurance. |
MBNA Travel Amex | None | 95 | Travel service; worldwide travel insurance; lost/delayed luggage (up to £1,500); travel inconvenience insurance (up to £750); £100k of travel accident insurance and free purchase protection; travel and hotel savings plus concierge and priority pass service. |
i24 MasterCard | 50,000 | 275 | 24-hour travel assistance; worldwide travel insurance; lost/delayed luggage insurance; flight delay/cancellation insurance; concierge service; priority pass to airport lounges; £350k of travel accident insurance and free purchase protection. |
Northern Rock Base Rate Visa | 10,000 | 24 | £25,000 travel accident insurance. |
Source: Moneyfacts
As you can see, travel accident insurance (or even full travel insurance) is a common feature. However, these policies include limited benefits and tight claims criteria, which reduce your chances of making a successful claim. Furthermore, many policies require you to pay for your holiday using your credit card, which could mean coughing up a transaction cost of an additional 2%+.
Therefore, my advice would be to choose a Best Buy travel insurance policy, pay for your holiday by cheque or debit card, and steer clear of credit cards which charge annual fees. By shopping around for the best cards to suit your different requirements, you can then use the money saved to buy whatever extra benefits you need.
Finally, don't be tempted to pay an annual fee purely in order to enjoy the imaginary snob value that Gold and Platinum cards pretend to provide. As you can see from the table above, 'precious metal' credit cards are available to most borrowers, even those with modest annual incomes. Hence, Gold or Platinum credit cards are somewhat tarnished these days -- they won't improve your social status, but could harm your wallet or purse!
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