When to Choose a No Fee Card Over a Rewards Card
Choosing the right credit card can be a daunting task, especially when weighing up the benefits of no-fee cards against rewards cards. While rewards cards can offer enticing perks, there are situations where a no-fee card might be the smarter choice. This article explores when it makes sense to opt for a no-fee card over a rewards card.
Understanding No-Fee Cards
No-fee cards, as the name suggests, don’t charge an annual fee. These cards typically offer a straightforward approach to credit, focusing on low costs rather than additional perks. Some popular no-fee cards include the Kiwibank Zero Visa Credit Card and the ASB Visa Light.
The Appeal of Rewards Cards
Rewards cards, on the other hand, offer incentives like cashback, Airpoints, or other loyalty points on your spending. These cards often come with additional benefits such as travel insurance or airport lounge access. However, they usually charge an annual fee to offset these perks.
When to Choose a No-Fee Card
1. You’re a Low Spender
If your monthly credit card spend is relatively low, the rewards you earn may not outweigh the annual fee of a rewards card. For instance, if you spend less than $12,000 annually on a card with a $100 annual fee, you might struggle to earn enough rewards to justify the cost.
2. You’re Building Credit
For those new to credit or rebuilding their credit score, a no-fee card can be an excellent starting point. It allows you to establish a credit history without the added pressure of an annual fee.
3. You Want a Backup Card
If you’re looking for a secondary card for emergencies or occasional use, a no-fee card is ideal. It won’t cost you anything to keep it active, even if you rarely use it.
4. You Prefer Simplicity
No-fee cards often come with straightforward terms and conditions. If you don’t want to track points or navigate complex rewards systems, a no-fee card offers simplicity.
5. You Carry a Balance
If you occasionally carry a balance on your credit card, the interest you pay will likely negate any rewards you earn. In this case, a no-fee card with a low interest rate, like the ANZ Low Rate Visa Card, might be more beneficial.
6. You’re on a Tight Budget
For those on a strict budget, every dollar counts. A no-fee card ensures you’re not paying for card ownership, allowing you to allocate that money elsewhere.
Considerations Before Choosing
While no-fee cards can be advantageous in many situations, it’s essential to consider the following:
Interest Rates
Some no-fee cards may have higher interest rates to compensate for the lack of an annual fee. If you think you might carry a balance, compare interest rates carefully.
Foreign Transaction Fees
If you travel frequently or make international purchases, check the foreign transaction fees. Some rewards cards waive these fees, which could save you money despite the annual fee.
Hidden Costs
Even no-fee cards may have other charges, such as late payment fees or cash advance fees. Always read the terms and conditions carefully.
Opportunity Cost
Consider what you might be missing out on by not having a rewards card. If you’re a big spender in categories that earn high rewards, a fee card might still be worth it.
Making the Decision
To decide between a no-fee card and a rewards card, consider your spending habits, financial goals, and lifestyle. Calculate your average monthly spend and compare it against the potential rewards and the annual fee of rewards cards.
For example, if you spend $24,000 annually on a rewards card that earns 1 point per dollar and requires 150 points for $1 in rewards, you’d earn $160 in rewards. If the card has a $100 annual fee, your net benefit is $60. In this case, a no-fee card might be preferable unless the rewards card offers additional valuable perks.
Choosing between a no-fee card and a rewards card isn’t always straightforward. While rewards cards can offer attractive benefits, they’re not always the best choice. No-fee cards shine for low spenders, those building credit, as backup cards, and for people who prefer simplicity or are working within tight budgets.
Remember, the best credit card for you aligns with your spending habits and financial goals. Whether you opt for a no-fee card or a rewards card, the key is to use credit responsibly, pay your balance in full each month if possible, and choose a card that provides value without unnecessary costs.