What's the benefit of a credit card with an annual fee, vs. a no-fee card?
How would you respond to these cases: Limited card options - If someone has a bad credit record the cards available may only be those with an annual fee.  Not everyone will have your credit record and thus access to the cards you have. Some annual fees may be waived in some cases - Thus, someone may have a card with a fee that could be waived if enough transactions are done on the card.  Thus, if someone gives enough business to the credit card company, they will waive the fee. On the point of the rewards, if the card is from a specific retailer, there could be a 10% discount for using that card and if the person purchases more than a couple thousand dollars' worth from that store this is a savings of $200 from the retail prices compared to what would happen in other cases that more than offsets the annual fee.  If someone likes to be a handyman and visits Home Depot often there may be programs to give rewards in this case. Credit cards can be useful for doing on-line purchases, flight reservations, rental cars and a few other purchases that to with cash or debit can be difficult if not close to impossible. Some airline cards have a fee, but presumably the perks provide a benefit that outweigh that fee over the year. I'm thinking of the Citibank cards tied to American Airlines, first year free, then an $85 fee. Just to make this a little less vauge, I will base everything on the Mercedes Benz American Express (MB AMEX) card, which is the closest to a $100 annual fee I found on American Express's website. The benefits of a card with an annual fee generally are worth the cost if (and only if) you spend enough money on the card, and avoid paying interest to offset the benefit.  Using the MB AMEX card as a reference, it offers 5X points for Mercedes Benz purchases, 3X points at gas stations, 2X points at restaurants, and 1X points everywhere else.  Even if we only make purchases at the 1X rate, it only takes charging $10,000 to the card in a year in order to make up the difference.  Not too hard to do on a card someone uses as their main method of payment.  Every dollar spent at the higher rates only makes that easier. There are a number of other benefits as well.  After spending $5,000 on the card in a year, you receive a $500 gift card towards the purchase of a Mercedes Benz car.  For anyone on the market for a Mercedes Benz, the card pays for itself multiple times with just this benefit.
My experience is in the United States only. In the past, American Express marketed its products as more exclusive and prestigious than other cards.  There was an attempt to give the impression that cardholders were more qualified financially.  In return, fees were higher both to merchants and to cardholders.  At the time (early 1990's), it was not common to use credit cards for small purchases, such as groceries or fast food.  Credit cards were used for larger purchases such as jewelry or electronics or dinner in a nicer restaurant. Once it became popular to use credit cards for everyday purchases, the demand for customers using credit cards changed to the highest number of people instead of people of higher status.  At that point, Visa (and to a lesser extent Mastercard) transaction volume increased dramatically.  Merchants needed the largest number of customers with cards, not the most financially stable.  As Visa volume grew, and people started using Visa for small purchases, the use of American Express decreased as their habits changed (once someone got used to pulling out Visa, they did it in every situation).  Merchants are less willing to go through the extra hassle of accepting cards that are used by fewer people.  Over time, I suspect this process led to the gap between Visa and American Express. As a merchant, in order to accept credit cards, you have to set up a bank account and maintain a merchant account.  Accepting Visa, MC and Discover can all be done through one account, but American Express has traditionally required a separate relationship, as well as its own set of rules and fees that were generally higher.  Since there are relatively few American Express cardholders compared to Visa, there is doubt about whether it is worth it accept the card.  It depends upon the customer base.  Fine restaurants still generally accept American Express. A debit card takes the funds right from your account. There's no 'credit' issued along the way. The credit card facilitates a short term loan. If you are a pay-in-full customer, as I am, there's a cost to lend the money, but we're not paying it. It's part of the fee charged to the merchant. Thus the higher transaction cost. Possibly not relevant to the original asker, but in the UK another advantage of using a credit card is that when making a purchase over £100 and paying by credit card you get additional protection on the purchase which you wouldn't get when paying by debit card. E.g. if you buy something costing £100 and the company goes bust before it's delivered, you can claim the money back from the credit card company.  Whereas if you paid by debit card, you would potentially lose out. This protection is a legal requirement under Section 75 of the Consumer Credit Act 1974. "Aside from an annual fee, if any, the card issuer makes money 2 ways, the transaction fee, about 1.5%-2% charged to the merchant, and interest from you if you leave a balance month to month. Obviously, the bank has some cost in processing statements and maintaining your account. If up front you are saying you will not have any chance of providing a certain profit level, they may have no interest in your business. (As you updated.) Other card issuers (almost surely with fees) might. Put the cards on ice. A bag of water in freezer. Don't be so hasty that you ding your report this way. By trashing the history as well as utilization, you may impact your score enough to do some harm if you actually need credit in the near future. I know this is a game with the credit agencies, a ""how good a borrower am I"" game, but it can really impact your bottom line if you don't play along.  In reply to Michael's comment 1/5/15, if I have one card and am budgeted for $1000/mo in spending, in order to keep utilization down to less than 20%, I'd need a line of more than $5000. Even if I ignore utilization, my January spending is $1000, but the bill is cut on the 31st and not due till Feb 25th. So a line of nearly $2000 is required unless you wish to make mid cycle payments on an ongoing basis." Back when they started, Discover undercut Visa and Amex fees by about a point. This was also true when I worked for a mail-order computer retailer in the '90s: if a customer asked us which credit cards we took, we were told to list Discover first (and AmEx last) because Discover had the lowest merchant charges. Possibly this is no longer true today, but for quite a while it was a significant selling point of the Discover card to merchants, and a reason why many did sign on. (A reason some stores did not sign on was that Discover was owned by Sears, and many businesses that competed with Sears didn't like the idea of sending any of their profits to the competition.) Today, Discover also owns Diners Club and the fees for those cards are higher. Yes, they're referring to the credit card dispute (chargeback) process. In the case of dispute, credit card company will refund/freeze your charge so you don't have to pay until the dispute is resolved (or at all, if resolved in your favor). If the dispute is resolved in your favor, your credit card company will charge back the merchant's service provider which in turn will charge back (if it can) the merchant itself. So the one taking the most risk in this scenario is the merchant provider, this is why merchants that are high risk pay significantly higher fees or get dropped. "Along with the commercials for ""frog"" protection from Discover, most credit card issuers provide fraud protection and zero liability for any unauthorized purchases. As was mentioned in one of the comments, many issuers also will allow temporary ""virtual cards"" that can be used in places that may not appear to be as reputable.  Depending on the type of pre-paid card you are using, you're likely paying some form of a fee for it, and you're certainly not taking advantage of the benefits that a credit card can provide, cash back being a big one. There are no annual fee cards out there that get 2%  cash back on every purchase." http://www.andrewsfcu.org/ is one of the only US financial institutions to issue a low or no annual fee chip and pin visa or mastercard.. Andrews is primarily for civilian employees of the Andrews Air Force Base but is available to members of the American Consumer Council, which offers free membership, see http://www.andrewsfcu.org/page.php?page=330 .  The chip and pin card is a visa with $0 annual fee and charges a 1% foreign transaction fee. Getting one is modestly difficult because you have to first join the credit union then apply for the card, then go through underwriting as if it were a personal loan rather than a revolving credit account.  Still, for travelers, it is probably worth it. "When you buy something with your credit card, the store pays a fee to the credit card company, typically a base fee of 15 to 50 cents plus 2 to 3% of the purchase. At least, that's what it was a few years back when I had a tiny business and I wanted to accept credit cards. Big chain stores pay less because they are ""buying in bulk"" and have negotiating power. Just because you aren't paying interest doesn't mean the credit card company isn't making money off of you. In fact if you pay your monthly bill promptly, they're probably making MORE off of you, because they're collecting 2 or 3% for a month or less, instead of the 1 to 2% per month that they can charge in interest. The only situation I know where you can get money from a credit card company for free is when they offer ""convenience checks"" or a balance transfer with no up-front fee. I get such an offer every now and then. I presume the credit card company does that for the same reason that stores give out free samples: they hope that if you try the card, you'll continue using it. To them, it's a marketing cost, no different than the cost of putting an ad on television." A search quickly led to http://www.cardfellow.com/blog/debit-card-credit-card-difference-charges/ which shows the difference in merchant fees charged. A $200 charge costs $3.50-$3.60, a debit charge, $2.34-$2.39 but a PIN Debit, $1.87. The debit cards are a full percent less cost to the merchant, so the money collected is less to use for rewards. (I can't help but wonder how my card gives me 2% cash back, no fee, when I never pay interest.) I have an American Airlines VISA with miles that has no annual fee, but only because I request that they waive the fee each year. Word to the wise - they've never refused. Many banks will waive the fee if you have a certain minimum balance, use direct deposit, or something similar.  That said, some banks and credit unions have no monthly fees under any circumstances.  Big banks only get away with terrible service and fees because most people don't shop around for banks. I'm surprised by all the pro-credit answers here, debit has some definite advantages. Most importantly, when you pay with a credit card, the merchant pays around 3% of the transaction to the credit company. In many states, they are forced to charge you the same amount, and this is frequently toted as ''consumer protection''. But consider what this means for the business: they loose money for every credit transaction, and they're legally forbidden to do anything about it. So you're taking 3% from a business and handing it over to a massive cooperation.  To make matters worse, the buisness is inevitably going to have to raise their prices (albiet by a small amount), so in the end the average consumer has gained nothing. On the other hand, the credit card company wins big, and they use their profits to pay lobbyists and lawyers to keep these rules in place. To put in the worst possible light, it's essentially legal extortion, verging on corruption. As for the fraud protection offered, while it may be true that credit cards will offer a more hassle-free reimbursement (i.e. you just don't have to pay the bill) if your card is stolen, consumer protection laws also extend to debit: in many cases your bank is legally required to cut you a check for all the money you lost. My view is from the Netherlands, a EU country. Con: Credit cards are more risky. If someone finds your card, they can use it for online purchases without knowing any PIN, just by entering the card number, expiration date, and security code on the back. Worse, sometimes that information is stored in databases, and those get stolen by hackers! Also, you can have agreed to do periodic payments on some website and forgot about them, stopped using the service, and be surprised about the charge later. Debit cards usually need some kind of device that requires your PIN to do online payments (the ones I have in the Netherlands do, anyway), and automated periodic payments are authorized at your bank where you can get an overview of the currently active ones. Con: Banks get a percentage of each credit card payment. Unlike debit cards where companies usually pay a tiny fixed fee for each transaction (of, say, half a cent), credit card payments usually cost them a percentage and it comes to much more, a significant part of the profit margin. I feel this is just wrong. Con: automatic monthly payment can come at an unexpected moment With debit cards, the amount is withdrawn immediately and if the money isn't there, you get an error message allowing you to pay some other way (credit card after all, other bank account, cash, etc). When a recent monthly payment from my credit card was due to be charged from my bank account recently, someone else had been paid from it earlier that day and the money wasn't there. So I had to pay interest, on something I bought weeks ago... Pro: Credit cards apparently have some kind of insurance. I've never used this and don't know how it works, but apparently you can get your money back easily after fraudulent charges. Pro: Credit cards can be more easily used internationally for online purchases I don't know how it is with Visa or MC-issued debit cards, but many US sites accept only cards that have number/expiration date/security code and thus my normal bank account debit card isn't useable. Conclusion: definitely have one, but only use it when absolutely necessary. "You should never close a credit card account unless it has an annual fee or you are overspending on it. Open lines of credit - even un-utilized ones - have a positive effect on your credit score. First of all, they increase your total credit which helps your score. Second of all, they are always ""paid on-time"" which is another benefit. Finally, they increase the length of your credit history. You can keep unused credit cards forever in your drawer. They are rarely closed due to inactivity and cost you nothing. However, if your card has an annual fee, you should close it. The potential loss to your credit score is unlikely to offset the annual fee."