No Annual Fee Credit Cards

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How do No Annual Fee credit cards work?

Essentially, no annual fee credit cards can save the financially prudent consumer some money. Anyone who never carries over a balance from one month to the next, therefore is never hit by interest charges, may feel a little peeved that they are behaving with total fiscal responsibility but are still paying a price for carrying a credit card. This will be more acutely felt by consumers whose credit cards never see the light of day except in the case of an emergency. Paying $40 or $50 dollars for something you rarely or never use can be galling.

The no annual fee credit card seeks to reward those customers by allowing for completely free use of their plastic. The only drawback in this scenario is that no annual fee credit cards can sometimes be no frills credit cards, so they may lack a rewards scheme or various other perks that are included as standard on cards that do charge a fee. However, this will not particularly impact customers who only use their card occasionally, as there spending will not be sufficient to accumulate rewards points that can be redeemed for much more than half a peanut.

Although the previous no frills situation is quite normal, there are also no annual fee credit cards that exist amongst the platinum range of credit cards. In this case, the platinum card in question is not likely to be the most prestigious, whose annual card fees can run into many hundreds of dollars such as the American Express Platinum Card. Still, if your income makes you eligible for such a platinum no fee card, it is worth checking out, because these usually still include the regular platinum perks such as free insurances and purchase protection.

Types of No Annual Fee credit cards

It is important to note that, although this would seem like an open-and-shut description, there are variations within no annual fee credit cards. There are three types to consider:

• No annual fee for life - This is the real deal, in that you are not charged an annual fee for as long as your credit card account remains active. It is always wise to check the fine print on these offers in case the provider is reserving the right to impose a fee after a certain period of time.
• No annual fee for the first year - This is where the fee is waived for the first twelve months, before the regular fee kicks in. In this case it is a good idea to take into account the level of the annual fee that will come into force in the second year, and make sure it is not much higher than other similar cards that charge for the first year. Waiving a $60 dollar fee in the first year will work out the same after three years as being charged $40 a year from the word go. After three years you will obviously start losing out with the $60 card, at least in terms of annual fees.
• No annual fee special discount - These offers usually rely on you having some other product with the bank or provider, such as a linked checking account. In this instance your fee may be waived or reduced in the first year only, or it may be an ongoing deal, compared to those customers who only take the credit card and are subject to the standard annual fee from year one.

It is also a sound move to double-check that you are applying for the card you really want. This may sound obvious, but some credit cards are not easy to differentiate between. For example, the HSBC Credit Card has a $0 annual fee guaranteed for life, whereas the HSBC Classic Credit Card has a zero fee for the first year, followed by $59 per year thereafter. Unless you are comparing these side by side on the HSBC website, you could mistake one for the other because the card design for both is identical.  

How to compare No Annual Fee credit cards

The most important point to watch out for with a no annual fee credit card is whether and to what extent the card provider is compensating themselves by waiving the annual fee. As mentioned already, if your card is for emergency use only, a no fee card that is also no frills should be perfectly acceptable. But for anyone who uses a credit card regularly and wants a no fee credit card because they always pay their bill in full each month, a lack of benefits and extras may be an issue. How much you are willing to compromise will be a personal choice, but this is certainly something to keep an eye on when deciding if a no annual fee credit card is for you.

Happily, the market is still sufficiently competitive at the moment following the global economic crisis that there are some great deals to be had that include a combination of no annual fee, a balance transfer offer, plus a very reasonable purchase interest rate.

The main issues to compare with no annual fee credit cards are:

• The annual fee - As discussed above, you need to check whether the absence of an annual fee is an ongoing deal or applies just for the first year. You need to balance this against the other features of the card.
• The interest rate - This is also known as the APR (Annual Percentage Rate), which is the rate of interest that is applied to any part of your balance you carry over from one month to the next. Unless you are 100% convinced you will always pay your debt off in full each month, then you should look for the lowest rate. This is to guard against the possibility that you will one day be unable to clear your debt in full at month-end. Remember that a high percentage rate can hit you hard if you decide to make a large purchase that it takes several months to pay off. You may save yourself $40 or $50 on the annual fee, but if this means accepting an APR of 18% rather than 10% on purchases, you can see how easily that saving can be eroded if months pass by with interest stacking up on a large unpaid debt.
• Interest-free days - Most credit cards allow up to 55 days interest-free credit on purchases, although some give 44 days. The interest-free period is the time between making your purchases and the payment due date on your credit card statement. Remember that you do not get 55 days interest-free on all your purchases; this is the maximum amount of time you can hope to obtain if your first transaction is on the first day of your new statement period. This is why it is important that you are sure your debt can be repaid in full by the due date. It is a very rare credit card that does not offer interest-free days on purchases, and there is no reason that this should be denied on the basis that the annual fee is being waived.
• Balance transfer offers - This is an extremely popular hook with which to catch new credit card customers, and these are not as common on no annual fee credit cards as they are on cards that charge a fee. However, if you do have a debt on another credit card and you can find a new provider offering a zero fee and a great balance transfer rate, you should grab it while you can. The card provider here is most likely gambling on the possibility that you will not be able to pay off your transferred balance before the offer period expires and a punitive interest rate takes over. Make sure you check the fine print in this situation because the rate your balance transfer reverts to may not be the regular rate of interest; it may instead be the cash advance interest rate, which is usually around 20%. It is the consumer's responsibility, therefore, to make sure that they choose a balance transfer deal that is realistic. In other words, one that offers a long enough period of time to completely repay the debt.

What can you expect with a No Annual Fee credit card?

There is no simple way to answer this because there are always different offers for every type of credit card, and no annual fee credit cards are no exception. Some providers tend to focus on the lure of the zero annual fee and spread a good number of them throughout their offerings, whereas other providers may include just the one.HSBC is a good example of a provider who uses the no annual fee lure, whether that's a zero fee for life or waived for the first year.

The important point is to make a thorough comparison of the market, not just when you want a new credit card but on a regular basis. In this way you will be able to recognise the best deals on an historical basis, rather than simply being able to spot the best deal amongst a range of credit cards at one moment in time. This has been amply demonstrated in the past two years or so when the economic crisis has been the determining factor in how aggressively credit card companies have marketed their products. Historically, this has been the best time for many years to apply for a new credit card.

So, apart from the considerations mentioned above, such as offers on balance transfers, what other things should you be looking out for with a no annual fee credit card?

Rewards programs - This is the most obvious "casualty" of the no annual fee credit card. How highly you rate credit card rewards programs will depend on how genuinely rewarding the scheme is, how much you spend on your card, and, occasionally, how gullible you are. The best rewards program is one that does not charge a fee and whose points return a decent dollar value - which is notoriously difficult to fathom at times. Generally, the worst kind of rewards program is one that charges a fee to become a member. In this case, unless your spending is naturally high, then surveys show that most people will end up losing out by participating, i.e. the rewards they receive cost less than they paid to join the scheme. This is made worse if people have overspent with the main intention of accumulating points, thus building up a debt they cannot pay off and that leads to the extra cost of interest charges.

Other perks - This is more relevant to gold and platinum credit cards, and includes such benefits as complimentary travel insurance, purchase protection and extended warranties on purchased goods. These more prestigious cards that do not charge an annual fee do not tend to remove these benefits; rather they may impose a purchase interest rate closer to the cash advance rate of 20%. One of the perks that is often strongly advertised is an online fraud guarantee, or protection against you card being used fraudulently anywhere. You shouldn't worry that taking a no annual fee credit card will mean this benefit is lost. If your credit card is a Visa, MasterCard or American Express, you are automatically protected by their zero-liability guarantees against fraudulent use. In any event, you are limited by law to a maximum liability of $50 for fraudulent use of your credit card.

Using a credit card comparison site, it is an easy task to pull up all the no annual fee credit cards on one page. This will allow you to get an overview of the main benefits of the various credit cards within your income eligibility range. It is then easy to see at a glance which benefits are supplied or denied by the different no annual fee credit cards. Don't be too taken in by big banner headlines that advertise one particular feature. First of all, it may be intended to distract from what is not being offered, or, even more cheekily, it may be shouting about an offer that is very easily beaten by most other credit cards. It is the psychological impact of the big headline that causes some people to not bother looking elsewhere. Supermarkets do this all the time. They set up a wall of "special offers" that have people throwing the goods in their trolleys, when a couple of aisles away are the regular-priced products that work out cheaper.

The message with no annual fee credit cards is always to look behind the headline and see if there is a better deal to be had. What other figures are involved, and what benefits are included or excluded? The information is there to be found; you just need to look, and to know which features will most closely suit your personal needs. 

How to use a No Annual Fee credit card

No annual fee credit cards can obviously be used as any other credit card, but you should always keep in mind the reason why you chose to avoid an annual fee in the first place; namely, because you wanted to avoid all costs associated with your credit card. This should tell you that spending to the degree that you cannot clear your balance each month is a bad idea. This is never a good idea no matter what kind of credit card you have, but you are generally likely to suffer a higher rate of interest with a no annual fee credit card than with a credit card that imposes an annual fee. This can be a delicate balance and requires that you do a little maths. An outstanding balance for one month of $50 at 18% is not going to negate the point of not paying a $50 annual fee. On the other hand, an unpaid balance of $2,000 for six months at 18% on a no annual fee credit card you saved $50 on is going to hurt a bit more than if you had paid your $50 fee and secured an interest rate of 10%.

Of course, it is not always an easy decision to make because crystal balls are hard to come by. You just need to make your decision on your past spending habits and hope that no unexpected expenses come your way.

To help you decide if a no annual fee credit card is right for you, these are the best reasons for choosing one:

Emergencies only - This is probably the best reason to go for a no annual fee credit card. If it is rarely or never going to be used over the course of the year because you prefer to use cash or debit cards, then you should avoid paying an annual fee on your credit card and it shouldn't really bother you what else is or isn't included.

You clear your balance every month - This has been discussed at some length already. If you are not going to pay interest on an unpaid balance, then a higher interest rate is neither here nor there if it means you avoid paying an annual fee.

Short-term financing of a purchase - Planned properly, so that a purchase is made right at the start of the 55 days interest-free period, a no annual fee credit card can be viewed as a way of taking a very short-term loan. This could be effective for anyone who needs to make a purchase that they know they will be able to cover by the time the bill is due, but the cash financing is not available at that moment.

You are debt-averse - If you are one of those people who simply will not let themselves fall into debt, then a no annual fee credit card may suit you very well. This does not mean you won't spend on your card, or that you're always in a financial position to pay off your bill in full each month; it just means that your attitude to debt is so anti that you will not risk the possibility of debt occurring and will choose to play it safe and keep your card in the dark rather than hand it over for a payment that might cause a problem.

In conclusion

You should now know enough to make an informed decision about whether a no annual fee credit card is right for you, and if so, what else you ought to be looking for. As one person's finances are different to the next person's, and predicting the future can be fraught with disappointment, you must take the time to carefully evaluate your own personal situation. Advice such as you have just read will always be essentially generic, as your finances are specific to you. 

Assess your situation, research the market, and you shouldn't go far wrong.