Guest Post: Why Credit Card Companies Charge Yearly Fees

For many consumers, credit cards provide a very helpful tool in their pursuit of financial independence. If used properly, credit cards can help people build their credit and even reward users with cash bonuses and gifts. However, if not used properly, that little piece of plastic can engulf irresponsible shoppers in a vicious cycle of debt that spirals out of control.

How Credit Card Companies Make Money
Credit card companies make the majority of their revenue from interest charged on existing debt. So while consumers enjoy the advantages of delaying full payment and accumulating rewards, credit card companies will happily oblige because they're making a mint on interest. On the surface, it seems like a mutually beneficial relationship.

In theory, it would make the most sense for financial institutions to have as many people using their cards as possible. Like most businesses, having more people use your product should equate to making more money.

That isn't necessarily the case, however, with cards offering generous rewards. Sure, most companies provide bonuses to consumers to instill customer loyalty and encourage frequent transactions each month. That only works if those same users are keeping a balance on their card.

Users who pay off their full balance each month, but still spend enough to collect hefty rewards, are known in the industry as "free riders." To dissuade these types of users, credit card companies charge annual fees. Doing so filters out these frugal chargers. Further, with the Credit CARD Act of 2009 taking effect, financial institutions are trying more than ever to find new ways to cut costs and drive new revenue streams.

No More Free Rides
In the past, credit card companies would entice new customers with low interest rates and high rewards. Companies could make more money on customers who accumulated debt interest than on annual fees. Once in the door, they could get their money back in many different ways, chiefly, raising interest rates at a whim. Not anymore.

So while annual fees do provide revenue for financial companies, it's not really a huge factor in relation to how much they can potentially earn from high-frequency users who carry a balance.

Also, if you notice, large annual fees can also serve to attract more desired customers, which helps to maintain a level of prestige for the brand. They want those customers who are willing to pay the annual cost. Yes, there is such thing as luxury-brand credit cards. It's the same idea of paying $200 for a T-shirt with a designer logo on it.

Credit Card Rewards
So does this mean that all rewards cards charge annual fees? Not even close. There are still many cards that provide users bonuses without the yearly membership payment. The difference is the rewards aren't as bountiful as they once were. That doesn't mean you can't still take advantage of them, though.

Here are a few cards that offer customers generous rewards, with and without an annual price tag. Depending on how much you earn back, sometimes it does make sense to bite the bullet and accept the fee.

No Annual Fee Rewards Cards
As with most no annual fee rewards cards, these usually require good to excellent credit to qualify:

• Chase Sapphire and Chase Freedom: These two cards from Chase charge no annual fee and offer cash back rewards at select merchants. Sapphire lets you earn $100 cash back after your first purchase. Free lets you earn 5 percent cash back on select quarterly categories, and an unlimited 1 percent on all other purchases. Both cards provide additional discounts with cash back rewards through select retailers.
• Discover More: This card provides 5 percent cash back on changing categories that you need to sign up for like travel, restaurants, shopping, etc. You can also earn 1 percent on all other purchases. There are additional discounts available through select retailers.
• Capital One No Hassle Rewards: If you're looking for a card with no expiration date for rewards, this card has it covered. You can earn 2 percent cash back on gas and groceries, and 1 percent on other purchases. The card does charge annual fees for average to low or limited history credit scores.

Premium Reward Cards with Fees
Usually, credit cards will charge annual fees for individuals with less than stellar credit. In this section, we're focusing on cards that charge fees for their premium rewards.

• American Express Green and Gold Cards: These cards waive the annual fees for the first year ($95 and $125, respectively) and let you earn one point for almost every dollar spent, three points when shopping with select online retailers and double points on its travel program. Though you can redeem points for rewards, there isn't a cash back option.
• Chase Sapphire Preferred: For $85 a year (first year waived), earn one point for almost every dollar spent, and double points for airfare booked through the card's reward program. There is also a 7 percent annual points dividend for all points earned. You can also get $250 in rewards; that is, if you spend $3,000 within the first three months.
• CapitalOne Venture Rewards: If you're a traveler, you can accrue miles with this card. The $59 annual fee is waived the first year. You can earn two miles on every purchase and get 10,000 bonus miles if you spend $1,000 in the first three months. Reward points allow you to fly free on any airline with no blackouts. You also won't get dinged for foreign transaction fees.

High Roller Cards
This bunch stand in a class of their own:

• American Express Centurion Card: Though it isn't necessarily a credit card, you can't mention high roller cards without mentioning the original "black card." The Centurion card is actually a charge card that users have to pay off each month. There is a one-time activation fee of $5,000 and an annual fee of $2,500. It's so exclusive, even the website is designed to be cryptic and vague for outsiders.
• American Express Platinum: Like the Centurion, this is also a charge card. The annual fee is a friendlier $550 per year, but applicants need to have an annual income of $65,000 or more. While you earn one rewards point for every dollar spent that can go to travel or charity donations, the card also provides luxurious perks, too. Members can get complimentary airline tickets for companions, access to VIP lounges, complimentary upgrades and more.
• Visa Black Card: Designed to compete with the two above, the Visa Black Card is actually more of a traditional credit card than charge card. The annual fee is $495, but members get similar benefits as the American Express Platinum. One difference is that users can opt for a 1 percent cash back return over airline points.

So there you have it. Which rewards cards do you like using? Are you willing to pay an annual fee for extra bonuses?

About the Author
This guest post was written by Go Banking Rates, bringing you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide.