What Is "Effective Annual Fee"?

By now you should be comfortable defining what an annual fee is. But to review, an annual fee is the cost of opening a credit card and keeping it year after year. Annual fees vary from $0 annual fee to over $600 a year for just owning a credit card.

An “effective annual fee” is a term used by credit card enthusiasts to determine the cost of the annual fee after subtracting all available perks, benefits, and credits provided by that specific card.

For example, if a credit card’s annual fee is $400 but a perk is that it gives you a $300 travel credit annually, then the effective annual fee would be $400 - $300 = $100. But it goes a little more in depth because not every perk, benefit, or credit is fully usable by everyone looking to get the card or that already have the card. From the previous example, if you aren’t able to travel for some reason, then the annual travel credit for that year would be of no value to you. So the effective annual fee would then be $400 - $0 = $400. Lastly, not all perks, benefits, and credits are valued at what they say they’re valued at. Here is where you decide what each perk, benefit, or credit is worth to you in a specific dollar amount. If you do not care about lounge access, then that perk would be of $0 in value. If you think that you will take full advantage of a $300 travel credit then that perk would be of $300 in value to you.

In conclusion, an “effective annual fee” is the published annual fee of the credit card minus the dollar amount you as a card holder puts on each perk, benefit, and credit. This is how I personally decide if a card is worth it for me to not only sign up for, but to keep long term. Always review your cards value after year one as some cards don’t hold up in value like others.