When is a credit card annual fee worth it?
To fee or not to fee: These tips will help you decide whether a fee card is right for you
Everyone wants to flash a credit card and be treated like a VIP. But what if those perks come at a cost?
Annual fees on credit cards can run the gamut, from $29 for the IHG Rewards Club Traveler to $2,500 for the invitation-only American Express Centurion. Often, the higher the fee, the better the benefits.
“There are certain cards that have a number of benefits that far outweigh the fee,” says John Perri, blogger and founder of the blog JohnTheWanderer.
While the Chase Sapphire Reserve card has, for example, an annual fee of $450, it awards an annual travel credit of $300 and yields a higher rate of return on points and rewards than the bank’s lower-tier cards.
And the American Express Platinum and Business Platinum cards (with annual fees of $550 and $450, respectively), grant complimentary access to American Express Centurion lounges for you and a guest.
“You can get gourmet food and craft cocktails while waiting for your flight,” says Perri. “If you’re a frequent flyer or business traveler, it makes sense, even if you pay more.”
But no matter the price and the perks, the real question is – is that fee worth it for you?
Whether you’re getting ready to renew an old card or thinking of picking up a new one, here are a few tips that will help you decide whether a credit card with an annual fee is right for you.
Annual-fee cards: A worthiness checklist
- Consider the sign-up bonus and rewards you’ll earn by opening the card.
- Take a look at your everyday spending and calculate potential savings.
- Don’t forget bonus categories that match your spending habits.
- Add ancillary benefits and services offered by the card.
- Check the fee-free alternatives. Getting the most from a fee card takes effort. If you’re not willing to put in the work, or if your lifestyle does not match the rewards being offered, go no-fee.
Consider the sign-up bonus
First on the list: How much will you reap in rewards just by opening the card?
“The benefit may easily outweigh what you have to pay in the first year,” says Julian Kheel, senior editor and senior analyst for The Points Guy.
“Each bank has a different type of point currency,” says Kheel.
Potential savings on everyday spending
After that, take a look at what you spend every month on a card – or what you plan to spend on a new one.
Are you one of those organized souls who tracks spending on a spreadsheet or checkbook program? This is where that pays off, says Aaron Aggerwal, assistant vice president of credit cards for Navy Federal Credit Union.
Not that organized? Look at it in terms of round numbers, he says.
For example, charging $1,000 a month at 2 points per $1 on the Navy Federal Credit Union Signature Visa Flagship Rewards card – which comes with a $49 annual fee – would garner 24,000 points annually, which translates to $240.
The amount of points earned – which can be redeemed for travel, gift cards, merchandise or charitable donations – would cover the annual fee and still leave you with $191 to spend.
Still undecided? Pull out some recent credit card bills or debit card statements to jog your memory. It’s also simple to do the math for cards that give you a flat rate on all your spending.
It will require a little finagling if you need to break things into categories such as dining, groceries, gas and travel – but there are many cards that offer extra bonuses on those categories, so a little effort can really pay off.
Don't forget bonus categories that match your spending habits
“When you’re calculating how much you use a card and the annual fee, keep in mind the bonus rates,” says Kheel. The card that gives you 1 or 2 percent on everything might give you twice that on dining or three times the normal rate on buying gas.
And how well do those categories match your spending? “If you don’t eat out, 2 to 3 points per $1 on dining probably isn’t that useful,” he says.
The key is to identify your largest expenses and find a card that gives you high bonuses on them – and the annual fee will most likely pay for itself.
One example: American Express Blue Cash Preferred, which comes with an annual fee of $95, offers 6 percent cash back on groceries on the first $6,000 in purchases a year – and 1 percent thereafter.
If it fits your spending habits, you could still net $265 after the annual fee.
On top of that, the card offers a sign-up bonus of $200 if you spend $1,000 in the first three months. That essentially means you won’t be paying an annual fee on the card for the first two years.
“You really do have to sit down and take a little time to look at how you’re spending your money,” says Kheel.
Add ancillary benefits and services to the mix
Some cards offer drool-worthy perks you can get regardless of how much you spend. These perks might not show up on your statements, “but the benefits are only valuable if you use them,” says Kheel.
American Express Platinum, for example, offers $200 in Uber credits annually, plus Uber VIP status. “If you use Uber, you’ve essentially knocked the fee down $200,” says Perri.
And when a flight was delayed six hours in San Francisco, Centurion lounge access (with complimentary food and drinks) saved Perri about $60 on airport meals and offered a nice place to wait. “I was able to relax with a couple of glasses of champagne,” he recalls.
Many airline cards, for example, also offer free checked bags when you travel. Even if you only go on vacation once or twice a year with the family, those savings can add up pretty quickly and offset your annual fee, he says.
And trip delay insurance, offered by many cards to cover expenses resulting from events such as flight delays, “can save hundreds,” says Kheel.
Can you get it for free?
Finally, annual fee cards offer some tremendous benefits, but you need to use them to get your money’s worth. A card with great travel benefits is of no value to someone whose greatest joys are to stay home, tend the garden and watch the kids grow up. Cards with fees also tend to be more complex and require effort to get the most out of them. Not willing to put in the work? Some of today’s cash back cards offer 1 percent or even 2 percent back on all qualifying purchases – without an annual fee – making them a better choice for the “set it and forget it” crowd.
However, if you do like a fee card’s features but don’t want to shell out that annual fee, check out cards with no annual fee. In some cases, you’ll find similar benefits without the annual price tag. Two examples:
- A handful of Citi cards with no annual fee (such as Double Cash and Diamond Preferred) also offer its popular “Price Rewind” perk. When you purchase something on the card and register that item with Citi, the bank monitors the price with retailers for the next two months. If it finds (or you find) a better deal, you get the difference.
- American Express offers a no-fee variation of Blue Cash Preferred called Blue Cash Everyday. The card offers 3 percent cash back at U.S. supermarkets on the first $6,000 in purchases and a sign-up bonus of $150 when you spend $1,000 in the first three months.
Looking at what you get for that annual fee is a smart move to revisit every year – preferably before you pay the fee.
But if you don’t realize it’s time until that fee hits your statement, never fear, says Kheel. Many issuers will reverse that fee if you opt not to continue with the card – as long as you do it within 30 days.
And don’t be surprised if the issuer offers to waive or discount the fee or offers you bonus points to keep your business, he says. For banks, “It costs a lot more to get a new customer than to keep one.”
See related: Poll: You can get better terms just by asking
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