How to Decide if an Annual Fee Credit Card Is Worth It for You
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Nobody likes to pay fees, especially for a credit card when there are free options available. But there are times when it makes sense to pay an annual fee for a card. Some of the best rewards credit cards offer perks and benefits that value at much more than the annual fee. If you are able to take advantage of them, it's definitely worth it to pay an annual fee for access to these benefits.
Here are a few questions to ask yourself when determining if a card with an annual fee is worth it.
Do You Pay Interest Charges?
About half of American credit card users avoid interest charges by paying their entire statement balance in full, every month. The rest will incur interest charges throughout the year when they choose to carry a balance. If you are paying interest charges, you should instead focus on using the card with the lowest possible APR, not the best rewards program. If you are able to pay your balance in full each month, then move on to the next questions.
Does Your Spending Habits Match the Rewards Offers?
If you avoid interest charges by paying off your statement balance each month, then it's in your interest to earn the most valuable rewards possible in the form of points, miles, or cash back. You will find that the credit cards that offer the highest rate of return on your spending will tend to be the ones that also have an annual fee.
At this point, you must calculate if paying an annual fee is worth the additional rewards that you are able to earn from that card. Furthermore, it's important not to just consider the total rewards the card offers, but how much additional rewards it offers compared to a similar card that does not have an annual fee.
For example, take the Blue Cash Preferred Card From American Express. This card offers generous rewards in the form of 6% cash back on up to $6,000 spent each year at U.S. supermarkets, 3% cash back at U.S. gas stations, and 1% cash back on all other purchases. But is its $95 annual fee worth paying?
You might think you just need to spend $1,584 per year at U.S. Supermarkets to break even (6% of 1584 is about 95), but you'd be losing out if you get the card. The Blue Cash Everyday Card offers 3% back for groceries with no annual fee. Rather than getting $95 only to pay a $95 fee, you'd get back $37.50 with the no fee version. That's why it's important to compare the annual fee card with one that has no annual fee.
The threshold to benefit from the Preferred version is $2,500. At that point, you’d earn $75 with either card ($150 on the Preferred, but minus the $95 annual fee). Anything beyond that would begin to net you more cash back with the Preferred card. Additional spending at U.S. gas stations and qualifying U.S. department stores would also contribute to making the American Express Blue Cash Preferred more valuable than the no-fee Blue Cash Everyday card for some cardholders. Read our review to see if the Blue Cash Preferred Card is right for you.
Most credit cards that have an annual fee have a no-fee version with reduced rewards. It might seem like a no-brainer to skip the annual fee card, unless you stop to actually do the math.
Are You a Frequent Traveler?
In addition to increased rewards, there is another kind of feature that you are likely to find on credit cards that have an annual fee. Many travel providers such as airlines and hotels team up with banks to provide co-branded credit cards that offer valuable travel perks. For example, an airline credit card might offer priority boarding, a checked baggage fee waiver, and even access to the airport's business lounge. And when a hotel chain offers a credit card, it may include benefits such as late checkouts, room upgrades, and even free breakfasts. When the value of these benefits exceeds the cost of the card's annual fee, than it's worth paying to hold that card, even if you rarely use it to make purchases.
See also: Best Airline Credit Cards
The premium Amex Platinum card has a $400 annual fee. However, its benefits include TSA PreCheck or Global Entry reimbursement, a $200 credit for airline fees, global lounge access (worth $850 or more), and many other benefits and services. If you are able to use these benefits, the card ends up saving you quite a bit of money even with the annual fee.
By taking into account all of the possible benefits of credit cards with annual fees, you can decide if carrying the right card is worth the cost. See our favorite credit cards with annual fees.