Credit card annual fees: when they're charged, the first-year cap and the break-even math

What is a credit card annual fee and when is it charged?

It's a yearly charge for having the card. It's usually billed when the account opens and again each year you keep the card.

Capital One calls it the price you pay the issuer each year to have a certain card. It says the fee may land on your first bill, comes back after a year, and that some issuers bill it in monthly installments ^[5]. Bankrate agrees: usually charged at account opening, then billed each year the card stays open ^[4]. The fee is added to your balance, so it shows up on your statement ^[5].

The fee doesn't earn rewards, either. Chase's terms, for example, list fees of any kind, annual fee included, among the charges that don't count as purchases for rewards ^[9].

Where do you find a card's annual fee before you apply?

In the rates-and-fees table on or next to the application, often called the Schumer box. Federal rules say the annual fee has to be in it.

Regulation Z requires card applications and solicitations to show certain rates and fees in a table, placed prominently, and online it has to sit close to the application ^[3]. Fees for issuance or availability, which is where annual and membership fees go, are one of the required items ^[3]. A monthly fee has to show its yearly total as well. The regulation's example is a $10 monthly fee shown as $120 a year ^[3]. Bankrate calls this table the Schumer box ^[4].

A fee for an extra card on the account, beyond the first, has to be in that table too ^[3]. That's where a fee to add an authorized user would show up.

How much can a credit card charge in fees in its first year?

No more than 25% of the credit limit you start with, under the CARD Act. Late, over-limit and returned-payment fees don't count toward that cap.

The 2009 Credit CARD Act limited certain fees in the first year after an account opens to 25% of the initial credit limit, the CFPB says. Its example: on a $400 limit, first-year fees generally can't go over $100 ^[6]. Regulation Z has the details. The cap covers the fees you're required to pay in that first year, other than interest. Late payment, over-limit and returned-payment fees are left out, along with fees you don't have to pay ^[1].

The year starts when you can first use the account, not when the issuer set it up on its systems ^[1]. If the issuer cuts your limit during that year, it has to remove fees above 25% of the new limit by the end of the next billing cycle ^[1]. A security deposit charged to the card counts as a fee, but a deposit you pay separately isn't limited by the cap ^[1]. The CFPB later took fees charged before an account opens out of the cap ^[6].

Do you get a warning before an annual fee renews?

Yes. Before charging a renewal fee, the issuer must send a notice and give you time to close the card and have the fee reversed.

1. Watch for the renewal notice It has to arrive at least 30 days or one billing cycle, whichever is less, before the statement that first carries the renewal fee ^[2].
2. Find the deadline in it The issuer has to say clearly when you must act to avoid the fee. You get at least 30 days or one billing cycle, whichever is less, from the notice to decide ^[2].
3. Close in time if you don't want to pay If you close the account in that window and the fee was already billed, the issuer must reverse it promptly ^[2].

After the window, a refund is up to the issuer. Capital One says you may not get one if you've already paid the fee for the year ^[5]. One cardholder told the CFPB a bank refused to refund or prorate the fee after they cancelled ^[8].

How do you know if a credit card annual fee is worth it?

Work out what the fee card earns beyond a no-fee card at your real spending. If that gap is bigger than the fee, the fee pays for itself.

Capital One suggests the same method: estimate the rewards at your spending and set them against the fee ^[5]. Count credits and perks only at what you'd have spent on those things anyway. A worked example is in the table below.

A welcome bonus can make year one look good, and Capital One notes it may help offset the fee ^[5]. But the bonus is paid once and the fee comes back every year. Run the numbers for year two. More in sign-up bonuses.

Should you downgrade or close a card with an annual fee?

Downgrading to a no-fee card keeps the account and its credit line open. Closing ends the fee but can raise your utilization.

Capital One says you can ask your issuer to switch you to a no-fee card, called a product change, and that this may help you avoid the credit score effects of closing ^[5]. The CFPB says closing a card can raise your credit utilization ratio and lower your score, though the change may be temporary or minor. It also lists annual fees or terms that outweigh the benefits as a case where closing might make sense ^[7].

Check any bonus terms before you do either. The CFPB quotes card terms that let an issuer take back a credit if you cancel or downgrade within 12 months ^[8]. More in closing a credit card.