Credit Cards and You: Service Fees on Credit Card Transactions

Annual fees

Some credit cards have an annual fee. The annual fee often allows you to obtain extra rewards and benefits, or a lower interest rate. For a list of credit cards with and without annual fees, see FCAC's publication Credit Cards and You, which is available on line at: www.fcac.gc.ca.

You usually pay the annual fee once a year. It is either billed on the first monthly statement you receive once you get your credit card, or on the anniversary of the date the card was issued. If you add any other options to your card later on, such as reward programs, the annual fee is usually "prorated" from the date these changes come into effect. (Prorated prices are prices that are adjusted for a time period that is longer or shorter than normal. For example, if a service usually costs $50 for one year, but you add that service halfway through the year, the prorated price – what will be added to your bill – should be $25.)

If you cancel an option that is covered by the annual fee — such as a reward program — you may not be paid back for the period you didn't use.

If you usually carry a balance on your credit card, you might be able to save money by getting a card with a low interest rate, even if it has an annual fee. This is because the low rate might save you more than the annual fee costs you. The greater the balance you carry on your credit card, the greater the chance there is that you could save money with a low-rate card, even if it has an annual fee.

For example, let's compare a low-rate credit card that has an annual interest rate of 9.99 percent and an annual fee of $50, to a regular rate credit card that has an annual rate of 19.99 percent, but no annual fee.

If you owe $500 on your card, the actual cost of your low-rate card will be 19.99 percent per year, because:

• you must pay an annual fee of $50 (which works out to 10 percent of $500);
  
  
• you must pay the interest on the balance you owe, for a year at 9.99 percent;
  
  
• this amounts to: 10 percent + 9.99 percent = 19.99 percent.
  
  

In this case, the low-rate card with an annual fee offers no cost savings over the regular rate card.

If, however, you have the same card and you carry a balance of $2,500, you will:

• still have to pay an annual fee of $50 (which is 2 percent of $2,500)
  
  
• pay the interest on the balance you owe, for a year at 9.99 percent;
  
  
• this amounts to: 2 percent + 9.99 percent = 11.99 percent.
  
  

In this case, you'll save money by using the low-rate card with an annual fee instead of a regular rate card with no annual fee.

If you carry a balance on a regular basis, you may want to consider other, less expensive ways to borrow money, such as taking out a personal loan or a line of credit.

The following table shows how much you could save, depending on your situation: