Should You Pay Your Card’s Annual Fee? Here’s How to Decide
May 9, 2017
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The best travel and rewards credit cards really can offer the unthinkable – something for nothing. By using your card for all your purchases, you can earn points redeemable for cash back, travel rewards, gift cards, or merchandise. The catch, however, is that you must avoid carrying a balance if you want to avoid credit card interest. When you fork over interest payments, you wipe out any rewards you earn.
Then there is the other “catch” that makes those rewards less than free – your credit card’s annual fee. While an array of rewards cards never charge an annual fee, most cards with lucrative rewards programs do. And if you fail to take this fee into account, your rewards could wind up costing money.
So, how can you determine whether a card’s annual fee is worth it? Here are five simple steps:
Step 1: Place A Dollar Figure On The Signup Bonus
Some cards offer signup bonuses so lucrative they make paying an annual fee more than worth it. Take the Barclaycard Arrival Plus™ World Elite MasterCard®, for example. This card lets you earn 50,000 points worth $500 in travel after you spend $3,000 on your card within the first 90 days. Plus, you earn 2x points for each dollar you spend, along with the ability to redeem them for any type of travel.
The $500 bonus makes the card’s $89 annual fee (waived the first year) seem like a pittance, doesn’t it?
If you’re considering a card with an annual fee, one way to gauge the value is figuring out how much your card’s signup bonus is worth. If the bonus is worth hundreds of dollars, it can more than make up for the annual fee.
Step 2: Figure Out How Much You Spend On Credit Each Year, Then Estimate Your Earnings
Another way to determine the value of an annual fee is to consider how many points you’ll earn in the long run. As an example, let’s use the Barclaycard Arrival travel credit card again. This card charges an $89 annual fee after the first year, yet it doles out 2x miles for each dollar you spend.
To earn enough miles to cover the $89 annual fee, you would need to spend around $4,500 on your card every year (2x 4,500 = 9,000). If you spend a lot more than that on credit, the fee could make up for itself in no time.
Before you sign up for a card that charges an annual fee, make sure your average spending will make up for it. If you’re unsure how much you spend on credit on a regular basis, get out your old credit card statements and check.
Step 3: Consider Your Card’s Added Perks
While cash back and travel rewards are a huge incentive, there are plenty of other reasons to love your rewards credit card. Some cards offer added perks like primary auto rental coverage, extended warranties, price protection, and trip cancellation/interruption coverage, for example.
If you find yourself using this type of coverage often, then your card’s annual fee may be well worth it. By paying your card’s annual fee, you can score a ton of valuable benefits you no longer have to buy.
Step 4: Compare No-Fee Card Options
Before you dive into a rewards or travel credit card with an annual fee, you should also consider no-fee cards. While you’ll typically earn fewer points for your spending, you won’t have to factor fees in. Let’s say you chose the Barclaycard CashForward™ World Mastercard® instead of the Barclaycard Arrival travel card. With this option, you would never pay an annual fee. Plus, you would still get 1.5 percent cash rewards for every dollar you spend.
If you are on the fence about paying an annual fee, earning 1.5 cash rewards with no fee doesn’t sound half bad. You would earn less over time, but you could keep the card forever without paying for the privilege. Here are a few more no-fee options to consider:
Capital One® Quicksilver® Cash Rewards Credit Card – Earn $100 in cash back after you use your card for $500 in purchases within three months of approval. You also earn an unlimited 1.5 percent cash back on all purchases, and all without an annual fee.
Capital One® VentureOne® Rewards Credit Card – Earn a one-time bonus of 20,000 miles worth $200 in travel after you use your card for $1,000 in purchases within the first three months of approval. You’ll also earn 1.25 miles for every dollar you spend, and you’ll never pay an annual fee.
USAA Cash Rewards® American Express® Card – The USAA Cash Rewards® American Express® Card offers an amazing 2.25 percent cash back on grocery and gas purchases and 1.25 percent back on everything else. There’s no limit on the rewards you can earn, and you’ll never pay an annual fee or foreign transaction fees.
Step 5: Choose The Best Long-Term Option For Your Needs
Now that you’ve taken a close look at your card’s signup bonus, examined its long-term perks, figured out approximately how much you spend, and compared no-fee options, it’s time to choose the card that offers the most bang for your buck.
An annual fee shouldn’t be a deal-breaker, but it does need to make sense with your long-term credit and rewards goals. If you run the numbers and they don’t add up, a no-fee rewards card would probably serve you better.
If you’re trying to figure out the best rewards card for your needs, it helps to compare a wide range of cards. Figure out your ideal type of rewards (cash back, travel, or flexible), then see how all the cards in that category stack up.
If a few cards have an annual fee, don’t discount them right away. There are plenty of instances where paying an annual fee can be more than practical – it can be profitable, too.
If you spend a lot on credit each year, take advantage of credit card perks regularly, or just love a good signup bonus, your credit card’s annual fee could be a good investment. Before you decide, make sure you run the numbers, compare card options, and keep an open mind all along.