Is Your Credit Card Annual Fee Worth It? Here's How to Find Out.
Should you pay an annual fee for a credit card? This guide will help you decide.
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When it comes to selecting a credit card, you have a seemingly endless array of choices. And there’s a lot of variety among the different card offerings out there.
One big difference from one card to the next is whether a card has an annual fee or not. Some cards charge $450 or more each year just to become a cardmember, while others charge no annual fee at all.
These costlier credit cards tend to come with lots of perks , such as statement credits for making certain purchases, upgrades when you fly with a certain airline , or really generous rewards programs. But are they actually worth it compared with a free card that could perhaps offer some similar perks but without the annual cost? Here’s how you can find out.
Add up the value of the cardholder perks
The very first thing you should do when deciding whether to pay a fee for a card is to add up exactly how much the card’s perks would be worth — to you.
This means that you should consider only the cardholder benefits you’ll actually use when doing your calculation. If the card offers $15 in monthly statement credits when you charge at least $15 on Uber rides during the course of the month but you haven’t ever used the Uber app, don’t factor that perk into your calculations.
Some of the common perks you’ll see on cards with annual fees include:
Free companion airline tickets
Free checked bags for you and your travel companions on domestic flights
Airline lounge access
Statement credits for Uber rides, travel purchases, or other specific spending you do on your card
Early or late check-in at hotels
Free premium Wi-Fi at hotels
Upgraded rooms at hotels
You’ll need to estimate how much each cardholder perk is actually worth in order to do the math to see if the card is worth it. If the card offers free checked bags for you and a guest on American Airlines, for example, you could look up the baggage fee on American Airlines website. If it costs you $30 to check a bag on a domestic flight and you check bags three times a year, this perk would be worth $90 to you (or $180 if each time was roundtrip). But if you always fly first class and get to check a bag for free anyway, it would be worth $0.
You’ll also have to decide if you want to count the value of perks that would be nice to have, but that you wouldn’t otherwise pay for. You might like airline lounge access, for example, but if you wouldn’t pay for it if you didn’t have it free with your credit card, you may not want to factor in the value of lounge passes when deciding whether to pay for a card with an annual fee.
Once you’ve added up the actual value of the perks you’ll use, see if the dollar amount is greater than the annual fee you’ll pay for the card. If it is, your calculation is done and getting the card is worth it. If it’s not, then you’ll have to look at whether the card’s rewards program makes the card a good value for you.
See how much the rewards are worth
It’s common for cards with annual fees to offer more generous rewards than free alternatives. For example, you might get five times the miles or points for each dollar spent on travel purchases compared with double miles for spending on travel using a cheaper card.
If you get extra rewards, you’ll need to know just how many extra miles or points you receive — or how much extra cash back you get — compared with a card that’s free or has a lower annual fee. You also need to know what you’re likely to spend on the card.
Say, for example, you’re comparing a card that has a $95 annual fee and provides 2% cash back with a card that has no annual fee and provides 1% cash back. You’d need to spend enough on the card that the extra 1% cash back would equal at least $95 a year — so you’d need to spend $9,500 per year on the card. If you spend more than $9,500 on the card, you’d be better off paying the fee for the better rewards. But if you spend less than $9,500, the fee wouldn’t be worth paying — unless the member perks were enough to justify the cost.
If the card isn’t a cash-back card, you also have to decide if you’d actually use the extra rewards. If you’d earn 10,000 extra miles per year with the card that charges compared with the free card, but you wouldn’t be able to take enough trips to redeem the miles before they expire, then it isn’t worth it.
What about sign-up bonuses?
Sometimes cards that charge big annual fees come with generous sign-up bonuses, such as enough miles to score you hundreds of dollars in free travel. While you can consider these sign-up bonuses, the problem is that you only get them once in your first year as a cardholder.
After that, you’re stuck deciding whether to cancel an expensive card — which could hurt your credit score by reducing available credit limits and shortening your account history — or whether to keep paying the annual fee.
If you don’t mind canceling cards, then it’s sometimes worth signing up for a card with a big fee that gives a generous sign-up bonus. But you should always make sure you can meet the requirements to earn the bonus. These requirements might involve spending several thousand dollars in your first few months as an accountholder.
Is an annual fee card right for you?
There are numerous card offers out there boasting long lists of benefits you’ll get in exchange for paying an annual fee. To decide if that annual fee is worth paying, add up the value of the cardholder perks and the added rewards the card could provide you with and see if this offsets the fee. By doing these simple calculations, you can avoid wasting money on a card that it doesn’t pay to sign up for.
The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
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