Consumer Payment Card News

Card Annual Fees Versus Annually Free Cards

Card Annual Fees

Card annual fees for general purpose credit cards, such as Visa and Mastercard, have been a fixture in the U.S. marketplace since their inception in the late 1960s. When CardTrak began tracking U.S. major credit cards in the 1980s, all of the top ten issuers offered the same pricing: a 19.8% annual interest rate and a $20 annual fee. Allegations regarding price fixing among the top banks began to surface by banking regulators.

Then in 1985, a major disruption hit the marketplace when Greenwood Trust introduced the first nationally marketed major credit card with no annual fee, a competitive interest rate and credit limits on par with the big bank credit card issuers. The name of the card was the Discover card. It remains the Discover card today. The popular card was also issued by Discover Bank, part of Dean Witter Reynolds and now Discover Financial Services [DFS].

Building a Credit Card Network

Since Discover was not part of the Visa and Mastercard network, it required building its own network from the ground up. Top bankers scoffed at the notion Discover could pull it off.

Guess who is laughing now?

By the way, Discover acquired a Visa issuing bank, Mountain West Financial, in 1991 with plans to issue a Visa version of its card products to quickly expand its U.S. payment network. Visa and Discover ended up in a $2 billion anti-trust lawsuit. In 1992 the author (Robert McKinley) was the lead witness for Visa in the litigation. Discover won the jury trial in Salt Lake City, but the verdict was overturned by the U.S .Court of Appeals in Denver. The U.S. Supreme Court refused to take the case, so the verdict in favor of Visa stood.

Discover did not laugh then.

Does the annual fee really matter to consumers today?

While nearly all bank credit card issuers charge an annual fee, they also offer no annual fee versions with stripped down perks i.e. no cash-back, miles, points, etc. In many cases issuers charging no annual fee often levy a higher interest rate. There are currently 672 million Visa, Mastercard, American Express and Discover cards in the U.S. market with an estimated 225 million carrying annual fees, according to CardData.

Regardless, a significant portion of American consumers take into consideration the value of the annual fee when selecting a new card. Paycheck-to-paycheck consumers forget about the annual fee and then forced to juggle their budget a bit, reminding them it is a real “pain-the-arse.” (or “tochus”)

A new survey, conducted on behalf of Discover, reveals 70% of consumers are very satisfied with their credit cards with no annual fee, while in contrast, only 35% of respondents said they are equally satisfied with their credit cards requiring an annual fee.

The survey found two-thirds of consumers say a credit card’s annual fee factors into their selection, and similarly, six of 10 say having no annual fee is a very important factor when they choose a card.

Most people who pay an annual fee reported paying between $51-100.

Among consumers actively considering switching credit cards, the number one reason is to avoid paying the annual fee. Older consumers are more likely to consider switching to a new credit card because they do not want to pay the annual fee.

The Discover survey found the most popular benefits for paying an annual fee are to receive cash-back rewards (52%) and travel benefits/rewards (48%).

Are annual fees justifiable?

Absolutely!!

Especially for frequent travelers as opposed to working stiffs, who just want a decent interest rate, some cash-back and no surprises like the nasty fee popping up once per year.

If you charge heavily on your credit card(s) then you should run the numbers to see if it works for you. Charging more than $20,000 per year for business purchases or $6,000 per year for groceries can be worth an annual fee of $100 or more.

If you fly more than 100,000 miles per year and stay in hotels more than 50 nights per year then a $300 to $600 annual fee card could be a good choice.

Better yet if you travel big-time and are loyal to one airline and one hotel chain there are some real good annual fee cards offering not just points, miles and cash but also special perks like V.I.P. access to airport lounges or preferred seating.