Is an annual fee credit card worth the cost? A fee requirement often leads many people to quickly dismiss some credit cards, without giving them a serious consideration.
Deciding whether or not an annual fee is worthwhile varies from person to person and card to card. Yet, in many cases, it turns out the annual fee is actually totally worth it.
Here’s the best way for you to decide if it makes sense for you.
What are the total costs of having the annual fee credit card?
Credit card companies have to make money. Otherwise, there would be no credit cards. They make money primarily from:
- Interchange and processing fees every time a card is used from merchants
- Interest payments from customers
- Annual fees from customers
- Other fees and charges from customers
Did you notice how most of those fees are paid for by customers?
If you carry a balance from month-to-month, credit cards are generally not a good idea for you. That’s because credit card interest can go as high as 20.00% APR or more. And staying out of credit card debt is very important to your financial health.
However, if you pay off your card every month in full, you don’t pay any interest. And when you avoid overdraft on your credit limit, you avoid additional fees as well.
If you are a responsible card user and always pay off your balance in full each month, that is the time to consider a card with an annual fee.
Let’s take a look at the Chase Sapphire Preferred, considered by many to be one of the best cards for new travel hackers looking to get free travel. It has a $95 annual fee, which is waived for your first year.
If you don’t pay interest or other fees, the $95 annual credit card fee is the total cost per year to own that card.
What are the benefits of the card?
Now that we know how much the card costs per year, let’s take a look at the benefits. No annual fee credit card is worthwhile if you don’t get benefits from it, that’s the selling point.
Continuing to look at the Chase Sapphire Preferred, $95 per year is a lot. But if you can get more than $95 in value, it is completely worthwhile.
The Chase Sapphire Preferred card currently has a 50,000 signup bonus after spending $4,000 in the first 3 months you have the card. Then you get 2x points per dollar spent on travel and at restaurants, plus one point per dollar everywhere else.
The 50,000 point signup bonus alone is worth $500 in cash back. That is enough value to cover more than five years of annual fees!
However, using your points for cashback gets you the least value per point, at only 1 cent per point. If you use your points for travel, they are worth far more.
When you use Chase Ultimate Rewards points for travel through the Ultimate Rewards portal, you get 1.25 cents per point in value. That makes 50,000 points worth $625 in travel rewards.
But if you transfer to an airline partner, you can get even more value. 50,000 points are enough for a coach plane ticket to Europe from the United States or many other destinations. And those tickets don’t typically come cheap.
Do the benefits outweigh the costs?
You now know the cost of the card and the value of the rewards. Simple subtraction shows whether or not that card is worthwhile based on your spending habits.
I’m a serious travel hacker with 16 open credit cards, and a handful of those have annual fees. However, I have done the math and know that each card gives me more value than their cost thanks to free hotel nights and plane tickets. So to me, it is worthwhile.
Once I signed up for a card with a $450 annual fee. Although it was not waived the first year, the 100,000 American Airline miles I earned was enough to take me and my wife to Spain on round-trip tickets.
That trip alone made the $450 worthwhile. And I canceled the card after a year to avoid paying the fee again. But I had already received about $5,000 in value from the card, about 11 times the annual fee I paid when I opened the account.
If you are a frugal spender, you might find that it isn’t worthwhile. Or you may find that one card is a bad deal for you, but another is a good deal.
Maybe restaurants are not your thing, but you spend a lot of money on gas for your car. There are cards that reward fuel spending.
Some cards can even work together in tandem. If you have both a Chase Sapphire Preferred and Chase Freedom card, your Freedom points can be combined with your Sapphire Preferred points for even bigger rewards.
It all comes down to your personal spending habits, the value of the rewards attached to the card, and how that stacks up against the annual fee.
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