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Especially if you’re just getting started in the points and miles hobby, it could make sense to hold off on applying for cards with steep annual fees. Luckily, there are plenty of fee-free cards that offer great rewards — not to mention several reasons why holding a no-fee product can help your credit score over time, as TPG Senior Points & Miles Contributor Nick Ewen explains below.
Many of the top travel rewards credit cards out there carry annual fees. This isn’t surprising, as they tend to offer value-added benefits like bonuses on purchases and free nights at hotels. However, for both new and experienced hobbyists, cards with no annual fee should still play a role in your points and miles strategy. Today I want to go through the top-six reasons why everyone should have at least one no annual fee card in their wallet and keep that card open for years to come.
1. It Builds Your Credit History
One of the most important things that a no annual fee card can do is build up your credit history. There are many things to understand about credit before you begin applying for and utilize credit cards, and the most important is understanding how your credit score is calculated. Most lenders use your FICO score to determine your creditworthiness, and more than one-third of that score consists of your payment history. This is the largest single factor in your credit report.
By opening up a card with no annual fee and paying your balance in full every month, you’ll demonstrate to the major credit bureaus that you are a trustworthy client, and this can pay major dividends going forward. Your FICO score isn’t just used for credit card applications; building a positive credit history can make it easier to get approved for a car loan or improve the interest rate you can get on a mortgage. A single percentage point decrease could lower your monthly payment by $100 or more.
Of course, that’s not the only way a no annual fee credit card can improve your credit score…
2. It Increases Your Average Age of Accounts
Another factor in your FICO score is your average age of accounts. Though it isn’t nearly as important as paying your bill on time and keeping your credit utilization low, it can still help improve your overall credit score. Since you aren’t making a yearly investment by paying an annual fee, there isn’t really a need to cancel a card with no annual fee. Even if you use it infrequently, it’s still worth keeping it in your wallet (or desk drawer) to increase the average age of your credit card accounts.
The four cards that I’ve had for the longest are all no annual fee cards; two are from Bank of America and the other two are from American Express. I typically apply for 3-5 new cards every year, so my average age of accounts is relatively low:
However, if I removed those two no annual fee cards, the average length drops significantly, to just 2 years, 1 month. Even though I would still be in the same “Poor” category, losing 16 months would be a big drop.
Canceling one or more of these cards would also affect the next benefit of no annual fee cards…
3. It Keeps Your Utilization Low
Another critical aspect of your credit score is your utilization rate. This identifies how much of your available credit you’re currently using. It’s calculated by dividing your total outstanding balance on all of your cards divided by your total available credit. For example, if you currently have one credit card with a $10,000 credit limit and currently have a balance of $2,000, your utilization rate is 20%. The lower the utilization rate, the better. If a credit issuer sees that you are using a large portion of your available credit, that indicates a higher level of risk.
When you have a no annual fee card, that line of credit counts toward your total available credit, and if you keep your no annual fee card year in and year out, it should be easy to gradually bump up your credit limit on the card. Then, if your balance is typically low (or even zero), that will only help your utilization. In fact, this is one of the main reasons why canceling a credit card you rarely use may actually hurt your credit score rather than improving it, since your total available credit drops without a proportional drop in the amount of that credit you are actually using.
4. It’s Low-Risk
Another great reason to apply for and keep a no annual fee card is the low risk it carries. With a traditional card that has an annual fee, you must make sure to get enough value out of the card to justify that annual expenditure. Why pay $95 for a card like the Chase Sapphire Preferred Card if you can’t get at least that amount out of its varied benefits? With a no annual fee card, there isn’t that same pressure. There’s no up-front investment and no annual investment either.
5. It’s Easier to Get
One of the other nice things about no annual fee cards is that (generally speaking) they are easier to get. Now, it’s important to note that credit card issuers have complex formulas that are used to determine an applicant’s creditworthiness, including your numerical credit score, the various factors on your credit report and even your history with the given issuer. As a result, it’s impossible to say that X card is always easier to get than Y card.
That being said, if your credit history is lacking or less than stellar, you’d probably have a much easier time getting approved for cards without annual fees. Bankrate has some great lists of possible options for readers with fair credit or bad credit, and many of the cards on the list don’t require that up-front investment.
Of course, just because it may be easier to get a no annual fee card doesn’t mean you need to give up your points and miles…
6. It Offers Valuable Rewards
There’s no debating that cards with annual fees can provide some incredible value. However, you don’t need to sacrifice that value by opening and utilizing a card with no annual fee. There are still some fantastic ways to maximize these cards and unlock valuable rewards. Here are some of my favorites:
- Chase Freedom: 5% cash back on rotating categories plus 1% cash back everywhere else; ability to “convert” cash back to Ultimate Rewards points by pairing card with the Chase Sapphire Preferred Card or Ink Plus Business Card
- Chase Freedom Unlimited: 1.5% cash back on every purchase with no cap. As with the Chase Freedom, you can convert cash back to Ultimate Rewards points by pairing it with a UR-earning card
- Citi Double Cash: 1% cash back on all purchases when you buy and another 1% back as you pay your bill
- The Amex EveryDay Credit Card from American Express: 2x Membership Rewards points at US supermarkets (up to $6,000 per year); 20% point bonus when you make 20 or more purchases in a billing period
- Ink Business Cash Credit Card: 5% cash back at office supply stores and on telecommunications purchases (on the first $25,000 spent each year); 2% cash back at gas stations and restaurants (also on the first $25,000 spent each year); 1% cash back everywhere else
- The JetBlue Card: 3 points per dollar spent with JetBlue; 2 points per dollar spent at restaurants and grocery stores; 1 point per dollar spent everywhere else
If you’re just getting into the points and miles game, I would recommend any of these cards as a great starter card. However, remember that you’ll get even more value by adding other travel rewards credit cards to your wallet and using them in conjunction with one (or more) of these no annual fee options.
Experienced points and miles enthusiasts may dismiss cards with no annual fees as not offering nearly the return as those with annual fees. However, these cards can and should play an important role in your overall strategy, especially related to helping your overall credit profile. In fact, by applying for and keeping these cards open, you can actually make it easier to get approved for more premium cards. I hope this post has given you a framework for why this strategy makes sense!
How do you use no annual fee cards?
- Unlimited 1.5% cash back on every purchase — it's automatic
- Earn a $150 Bonus after you spend $500 on purchases in your first 3 months from account opening
- 0% Intro APR for 15 months from account opening on purchases and balance transfers, then a variable APR of 15.49-24.24%. Balance transfer fee is 5% of the amount transferred, $5 minimum
- Redeem for cash — any amount, anytime
- Cash Back rewards do not expire as long as your account is open
- No annual fee