Should You Avoid Rewards Cards With Annual Fees?
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For years, personal finance experts have exhorted consumers to avoid credit cards with annual fees. (See also: Avoid Bank Fees)
The anti-fee mentality is captured in a Yahoo! Finance article called, appropriately, “Why I Avoid Credit Cards With Annual Fees.”
I always avoid credit cards with annual fees because they are rarely worth the extra cost. Many companies try to compensate for high fees with reward programs, but there are cards that offer the same benefits without fees. I never use credit cards that have annual fees.
The offers of cash back, gift cards, merchandise and travel packages are alluring, but they are not worth the additional cost of paying an annual fee for the credit card.
In many cases, the author is correct. Many (perhaps most) consumers do not use their credit cards enough to justify the fees. Yet the author is wrong to make “avoid annual fees” a rigid, black-and-white rule.
For one thing, it is often possible to negotiate your annual fee down to a lower amount or get it waived entirely. One reader emailed Ramit Sethi of I Will Teach You to Be Rich to note that she got rid of the $95 fee on her American Express card simply by asking for it. (Half of life is just showing up, right?) When I worked with Ramit, we saw at least a handful of emails like that per week.
Running the Numbers: When It Makes Sense to Pay Annual Fees
Of course, not every company will agree to this, and you cannot count on it definitely happening. Even still, there are circumstances where it makes complete logical and financial sense to pay an annual fee.
It would be easy to scoff at a seemingly astronomical fee like $450 (the actual yearly fee charged to American Express Platinum Card members.) But the decision of whether to use this card doesn’t come down to gut feelings. It’s strictly a numbers game.
For example, let’s say you’re an extensive business traveler, in and out of new cities four to five times per month. The stomach-churning pain of forking over $450 is quickly erased by the massive pile of perks you'd receive. The same is frequently true of other rewards cards with smaller fees. A single free flight can easily, by itself, justify a $50-$100 fee. The more perks you get, the better a deal the annual fee becomes.
“But I Don’t Want the Credit Card Companies Making Money Off of Me!”
Even after seeing these examples where it plainly makes sense to pay a fee, you might still be reluctant. Something about paying to use a credit card just seems inherently unfair — like you’re being exploited by “the system” or “the banks.”
If so, I would encourage you to look at the bigger picture.
What matters more: achieving your financial goals, or spiting the credit card companies? If it can be factually proven that paying an annual fee makes you better off, it doesn’t matter that the credit card company also benefits from the arrangement. To place resentment of their profits above your own financial well-being would be doing yourself a huge disservice.
Having said all of this, I still advise all consumers to run the numbers. Do you spend a lot on your credit cards? Are you willing to put all or most of your personal spending on credit to maximize rewards? If so, you might be surprised to learn that annual fees aren’t the deal-breaker they are made out to be.
For consumers who don’t spend much on their credit cards, the fees probably WILL be a bad deal. If you only spend $50 per month on credit, and only get a 1% cash back reward, then of course you’re losing money with a $100 annual fee. That’s why it’s so important to run the numbers rather than assuming fees are good or bad.
There are often no-fee versions of popular rewards cards with similarly or equally compelling benefits. If so, it obviously makes sense to go with the no-fee option. My point is just that blindly avoiding ALL annual fees in knee-jerk fashion could deprive you of some terrific rewards!
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.