If you have fair credit, you may have noticed that more card issuers are doing away with an ‘annual fee’, and instead assessing monthly fees to their customers. We’ll break down why issuers are assessing monthly versus annual fees, and whether it’s a good deal for you.

But first, here’s an example of what we’re talking about, lifted directly from Credit One Bank’s disclosure page.

Credit One’s Fees section shows you how it works

To break it down, after the first year, Credit One charges its users a monthly fee that is the annual fee broken up into 12 equal payments.

Here’s another variation of how this fee is disclosed:

“$99 thereafter, billed monthly at $8.25”, they say…

Some cards start assessing a monthly fee right away, others wait until the second year. What’s kept ambiguous is who is eligible for getting a monthly fee, and what happens when you cancel.

The team behind Legit Lender ran focus groups and one-on-one interviews on this particular credit card feature. Overall, feedback was positive.

More Credit Available for Purchases

Many fair-credit customers end up getting  low ($500 or less) credit limits with their card. With a monthly fee instead of an annual fee, more of this credit line is open for purchases. For example, if a card came with a $350 credit line and a $75 annual fee, only $275 would have been available for purchases in the first month. With a monthly fee,  $343 is available for purchases in that first month.

Monthly Fee Matches Cash Flow

Many focus group participants also appreciated that billing an annual fee on a monthly basis (or, better yet, ‘replacing’ the annual fee with a monthly one) better suited their monthly budgeting. Getting an extra $70 fee tacked on to a credit card statement comes as a ‘shock’ to many folks rebuilding their credit. Having a predictable, monthly fee allowed folks to better manage their money.

Credit Card Companies Can Make More Money

A major motivation for card companies to offer a monthly fee is hoping that you are late when making your minimum payment. If you have a credit card that you never use, with an annual fee you need to make ONE on-time payment each year. With a monthly fee, you need to make TWELVE on-time payments each year. Credit card companies now have twelve chances to collect a late payment fee.

Additionally, credit card companies think you’ll stick around when your annual fee feels more ‘invisible’ than a big, once-a-year payment. It’s a known fact that many folks call in to cancel a card after they get hit with that hefty annual fee.

More fee revenue and fewer cancellations all mean more money for the credit card company.

To Take Full Advantage, Set Up Auto-Pay

Do you know the best way to ‘combat’ a credit card company’s strategy to hit you with more late fees? By simply set up automatic payments.  Have your credit card company draft payments from your checking account. Credit card companies are banking on you to get hit with late fees when you have 12 payments to make, instead of one. Don’t give them that satisfaction by paying your bill on time, automatically.

A monthly fee is a win-win for Customers and Card Companies

For folks rebuilding their credit, and maybe with a few past blemishes, it’s hard to find a no-annual-fee line of credit. But, overall, we think that a change from an annual fee to a monthly fee benefits the consumer. It provides more credit line to the consumer, better matches how folks budget, and pushes folks into setting up those critical automatic payments. We wouldn’t be surprised if this product change becomes a de-facto standard for fair-credit customers.