Why Pay an Annual Fee on a Student Card?

Annual fees, or the lack thereof, are very often a selling point for student credit cards. Many credit cards boast that there's no annual fee. Other cards have an annual fee that can range from $5 - $250. What's the difference and why?

It's important to understand that credit card companies are in the business of making money. As such, they can make money in one of three ways:

1. Annual fees which bring in a steady revenue stream.
2. Interest rates which bring in revenue based on balances carried.
3. Penalty fees which bring in revenue when customers miss payments.

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Student Credit cards with no annual fee are therefore counting on the cardholders to either carry a balance from month to month or to be late with payments. The benefits they provide will therefore be in direct proportion to the expected revenue stream.

Credit cards with an annual fee don't need to depend solely on late fees or higher interest rates in order to bring in money. A credit card with 200,000 cardholders and a $50 annual fee brings in a tidy $10 million, and so credit card companies can afford to be more generous with their cardholders, either in lower interest rates or increased benefits.

Before choosing a credit card with or without an annual fee, determine what kind of cardholder you are going to be, and dig into the details of the card's disclosures. If you know you'll be carrying a balance, do the math and compare the savings you'll reap from a lower interest rate plus annual fee versus a higher interest rate. If you desire certain benefits from a credit card, like frequent flier miles that never expire, consider the cards offering annual fees.