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This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don’t miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.

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This article is coming to you live from John F. Kennedy International Airport, where I’m waiting for an early-morning flight.

There’s a crying baby nearby, none of the in-seat power outlets work, and the terminal is so cold that I’m considering putting on a second sweatshirt. Attendants come over the intercom every 30 seconds to yell at people. Also, did I mention the smoothie I’m drinking cost $10?

It makes me long for private lounge access, which I’ve heard comes as a perk with some high-end credit cards. Nothing in my puny portfolio — which includes an American Express Blue Cash Preferred and a Chase Sapphire Preferred — offers that. But then again, they don’t cost me much to have. All my annual fees are under $100.

Come to think of it…

Why do some credit cards have annual fees?

The answer has to do with the Credit Card Accountability Responsibility and Disclosure Act of 2009, otherwise known as the CARD Act. The sweeping law beefed up a ton of consumer protections and “changed the landscape of the credit card market,” according to the Consumer Financial Protection Bureau.

The CARD Act altered several formerly-common industry practices, including prohibiting double-cycle billing, capping late fees and requiring new credit card customers to be at least 21. But what’s relevant here is that it “pushed cards towards a more simplified fee structure,” says Kelvin Chen, senior executive vice president and head of policy at the Consumer Bankers Association, a trade association for national and regional banks.

Before the CARD Act, there was a glut of what critics called “fee-harvester” cards, which had very low credit limits and charged exorbitantly high fees.

Here’s one example from 2007: This card ostensibly had a $250 limit, but by the time it piled on a $95 program free, a $29 account setup fee, a $48 annual fee and a $6 monthly fee — all paid upfront — the consumer would have just $72 in credit moments after signing up.

The CARD Act cracked down on that kind of sneakiness.

Now, Chen says, card issuers rely on just a few primary sources of revenue.

The first is interchange fees, which are paid by a merchant whenever a customer pays with a credit card. These are percentage-based, usually between 1% and 3% of the transaction value. (BTW, if you’re interested in learning more, there’s a whole political battle happening over interchange fees — check out my 2023 piece on the Credit Card Competition Act.)

The second is from interest paid by people who carry a balance from month to month. This is credit card companies’ main revenue source, which checks out when you consider how much they charge: As of August, the average credit card interest rate nationwide was 21.76%, according to the St. Louis Fed.

The third is fees, a category that includes annual fees.

And this is where the trend gets interesting. Over the past few years, the percentage of Americans who pay an annual fee has decreased, but the total amount of money paid in annual fees has more than doubled, increasing from $3 billion in 2015 to $6.4 billion in 2022, according to the CFPB.

From the card issuer’s perspective, charging an annual fee weeds out people who can’t or won’t pay for the card, which results in a more affluent customer base. That’s an intentional choice that benefits a company’s bottom line, says Vrinda Gupta, CEO and co-founder at Sequin, a woman-focused debit card startup.

Credit card issuers want richer people to own their cards because they spend more than the rest of us, which means the companies earn more income from interchange fees and interest. It’s all connected.

Obviously, not every credit card has an annual fee. (Money has a whole list of its favorite no-annual-fee credit cards, among them the American Express Blue Cash Everyday Card and the Chase Freedom Unlimited.)

In fact, Chen points out that annual fees have become much less prevalent lately for what the industry calls subprime and deep subprime cards — that is, cards for people with just-OK or bad credit. Cards that do have annual fees are now targeted at wealthier borrowers with high credit scores. Most of these cards even have minimum spending requirements — say, $3,000 within the first three months — to unlock certain bonuses.

Just one hangup. The average American has four credit cards, which means they’ve got a lot of choices. If I’m a credit card issuer, how do I get wealthy people to sign up for — and regularly reach for — my credit card as opposed to a competitor’s?

Simple: Offer them exclusive perks, like that lounge access I would’ve been thrilled to have while cooling my heels in the airport. High annual fees also help card companies defray the expense of offering benefits like a quieter, comfier airport experience. (I’ll dig into this in more detail in a future issue.)

The bottom line

Credit card annual fees are one of the major ways card companies make money in a post-CARD Act world. But it’s a two-way street: Gupta says issuers of high-fee cards “will strive to give you back that value” to make the fee worth it for you and to motivate you to use the card frequently.

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