How high is too high for a rewards card's annual fee?

Question for the expert

Dear Cathleen,
I'm looking at new rewards cards, and I'm kind of torn about annual fees. I don't want to pay one, but then again, cards are offering free companion tickets and free baggage fees and stuff like that. I guess my question is how much is too much to pay for an annual fee on a card? -- Shane


Answer for the expert

Dear Shane,
It depends on what you're going to get back, and that comes down to you -- how you spend your money and, in this case, how you travel.

If you opt for an annual fee that doesn't return more than its net value in rewards, year after year, you're paying too much. On the other hand, if a travel rewards card offers something you're going to use every year, and you can't get it from a fee-free card, a modest annual fee may prove worth the investment.

Are those free tickets and waived fees you mentioned an ongoing benefit? Assuming you're planning to make a long-term commitment to a credit card, look beyond the sign-up incentives when you weigh your options. Remember: You're going to be paying that fee every year, long after the initial incentives are gone. A card should continue to pay back your annual investment.

Even if those benefits are ongoing, they only benefit you if you use them often enough to justify the expense. Analyze your travel habits and be brutally honest with yourself. In a typical year, what do you pay out of pocket for companion tickets and baggage fees? If it amounts to three times the annual fee and you can't find those benefits in a no-fee card, I'd call that a good investment. If you fly once a year and limit yourself to what you can fit in the overhead compartment, however, you're not getting your money's worth.

I wouldn't dismiss a card with an annual fee purely on principle, however. Annual fees can range from $40 to $500 and beyond. Forty bucks a year isn't going to break you, but it should guarantee you at least $50 in meaningful rewards every year or what's the point? Likewise, most frequent travelers don't mind shelling out $90 for $300 worth of travel benefits. It's harder to justify paying $500 every year unless you have a specific goal.

For example, if you fly every week on business or make regular overseas trips, a card with steep annual fee may help you score elite status with an airline or hotel loyalty program. In that case, the fee is like paying to join a private club -- it's an investment in your own lifestyle. People who spend many hours in airports and airplane seats have a strong motive for wanting to upgrade. Their credit card can be the means to much-needed comfort and convenience.

If you're still stuck, ask yourself this: How are you going to feel in three years when that fee shows up on your bill? Will you wish you'd spent the money on a new jacket or that restaurant you've been hearing about? Or will you smugly remember what this card saved you over the past year?

See related: Despite predictions, credit card annual fees have not returned, Rewards card sign-up incentives get more generous

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Updated: 04-22-2019