(Photo: Hindustan Times)
(Photo: Hindustan Times)

Why pay a fee when there are zero-fee credit cards

  • Most credit cards that charge a fee come with extra benefits, but do you need them?
  • This (no-fee card) can help build your credit score and history, and your pathway to more premium and specialized cards

If you are in the market looking for a credit card, you are probably prepared to shell out an annual fee for the same. But why should you pay a fee when the market has zero-fee credit cards too? While paying a fee may entitle you to extra benefits, a zero-fee credit card may suffice if you do not use it a lot or are a new user. We explain why but first let’s start with the basics.

Types of credit cards

Credit cards give you free credit for 45-55 days after which it charges a monthly interest. Apart from this, there is an annual fee to pay, regardless of your usage pattern. Zero-fee credit cards, on the other hand, don’t levy any annual fee.

Then there are credit cards that are sandwiched between an annual fee and no-fee cards. These cards charge an annual fee initially but waive it off eventually after the user crosses a certain threshold of spends. For instance, State Bank of India’s (SBI) SimplyClick card charges an annual fee of 499, which is reversed if you spend 1 lakh through the card in a year. HDFC Freedom Credit Card charges 500 as annual fee but waives it off after you cross the 60,000 spending threshold in a year.

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“Even in case of premium credit cards that involve a relatively higher annual fee, card issuers usually offer annual fee waiver if you spend beyond the minimum threshold amount in the previous year," said Naveen Kukreja, chief executive officer and co-founder, Paisabazaar.com, an online marketplace for financial products.

Some banks also waive the annual fee against a security deposit. For instance, Axis Insta Easy Credit Card is issued against a minimum fixed deposit of 20,000, and SBI Card Unnati against a minimum FD of 25,000.

I like plain vanilla

Mrin Agarwal, financial educator, founder director of Finsafe India Pvt. Ltd and co-founder of Womantra, said, “A cashback, no-fee credit card which offers decent benefits is a good choice. Many fail to even redeem rewards and benefits of credit cards, so it makes sense to go for no-fee cards and get a cashback that reduces your amount due. Those who want to go for an annual fee card must see if the rewards they get in return are worth a high annual fee and whether they are actually using the rewards and benefits."

Go for zero-fee cards if you are using a credit card for the first time and figuring out how it works, how often you need to use it and the like. “This can be the stepping stone to building your credit score and history, and your pathway to more premium and specialized cards. It would also be an inexpensive way to increase your credit limit," said Navin Chandani, chief business development officer, BankBazaar, a loan aggregator.

Also, if you use your credit card sparingly, you should pick a plain-vanilla, zero-fee credit card. “No-fee credit cards are best for users who seldom use credit cards for making big-ticket expenditures," said Gaurav Chopra, founder and chief executive officer, IndiaLends, a financial technology startup.

If you have a bad credit score and are trying to repair it, go for a no-fee card and use the card for nominal expenditures.

I am ready for more

If you are a savvy credit card user, who knows how to use the rewards and benefits that cards offer, you could look beyond zero-fee cards. Cards that charge an annual fee, initially or otherwise, usually come with better reward features.

However, that will be suitable only if you have the financial discipline to not let your credit spiral into a debt trap. “The benefits of annual fee cards are endless as compared to zero-fee cards, especially for those who can afford them or are eligible for premium cards. The typical individual seeks travel, entertainment, dining, retail, and curated experiences. Premium cards may help them access these in a rewarding manner," said Chandani. While the annual fee may range from 1,000 to 10,000, the customer usually gets benefits in the form of vouchers, discounts and so on, added Chandani. “People looking for specific benefits may seek these cards."

Comparing flavours

We compared two credit cards from the same bank, one that charges no annual fee and another that charges a fee of 3,500. The zero-fee credit card gives regular benefits such as rewards points, cashback offers, discount offers, fuel surcharge waiver, complementary lounge access at select airports, and so on. The other card, however, has several other features besides the regular ones, including a chance to earn unlimited miles which never expire, award miles, priority pass membership and complimentary lounge access to a number of airports across the world, miles redemption in the form of free flights, upgrades, hotel accommodations, car rentals, 24X7 concierge services and the like. You even get insurance covers for baggage delay, checked-in baggage loss and personal accident cover, to name a few.

Clearly, you can’t expect no-fee cards to compete with annual fee cards in terms of reward points, but you need to evaluate if you really need these benefits. “A number of additional benefits, rewards and offers are directly linked to the annual fee. If a credit card provider is not charging any annual fee, then the number of benefits a user can avail on such a card will be way less when compared to a credit card that charges an annual fee," said Chopra.

Mint Money take

While standard no-fee cards too offer a wide range of benefits, annual fee cards work well for heavy spenders and those who want high-value rewards in return.

“Most of the top-rewards credit cards waive off the annual fee in the first year. In this period, one can identify one’s consumption pattern and dependency on credit cards. If consumption is less, one can opt for no-annual fee credit cards and if the consumption is higher one should opt for a credit card with an annual fee, as one can enjoy additional rewards associated with it," said Chopra.

A plain-vanilla credit card works for most, but if you want to upgrade, be ready to spend some time analyzing the trade-off.

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