How to Determine If an Annual Credit Card Fee Will Pay Off
Choosing a credit card can be a tricky decision, especially as fees and benefits can vary greatly from card to card. The annual fee typically ranges from $100 to $500 for more expensive cards with many benefits such as higher reward points, airport lounge access, and reimbursement. Depending on how much you plan to spend and travel, an annual fee can sometimes be justified. Other times not so much.
How much can you earn from rewards compared to a card with no annual fee
The best fixed rate cards with no annual fee usually offer 2% cashback (others offer tiered reward rates). The first thing you should do when considering an annual fee card is compare the reward you expect to receive from that card with the reward you can earn from a no-fee card that offers a flat 2% cashback rate. If you earn more on a card with an annual fee, even after taking into account the commission, then this is not a problem.
How much do privileges and benefits cost?
Another thing to consider is the perks and benefits that an annual card comes with. Some cards offer things like travel insurance, extended warranties, rental car insurance, and hotel or flight certificates. However, this is where things get a little more complicated, as these benefits will have different value to different people. Consider if you’re going to take advantage of the benefit, but if you don’t, it’s useless and you’re paying for nothing.
Take an extended warranty for example: if you buy something that offers an extended warranty and you would buy an extended warranty anyway , it will obviously save you money; but if you didn’t purchase an extended warranty it wouldn’t save anything unless the item actually breaks and you can’t use the warranty. Think of credit card benefits like your local gym – part of their business model lures you in with the idea of using a lot of things you’ll probably never touch unless you’re disciplined.
As a rule, it is better to divide the benefits into three categories and consider the value of each benefit accordingly:
- Otherwise, I would have paid for this allowance out of my own pocket. Consider the benefit at the full cost you would otherwise pay.
- I could take advantage of this, but otherwise I wouldn’t pay for it. Cut the benefit accordingly. If you are most likely to benefit from it, perhaps only reduce the benefit by 10%, whereas if you are unlikely to use it, discount the benefit by 95%.
- I am unlikely to take advantage of this. Completely ignore the value of benefits.
How likely is it that you will actually take advantage of this?
Keep in mind that many cards offer similar benefits, but they are not necessarily equal. For example, many premium cards offer some sort of annual travel credit:
- Chase Sapphire Reserve offers a $300 annual travel credit that is automatically applied as a credit statement whenever you make a purchase in the travel category.
- The American Express Platinum Card offers a $200 airline emergency credit that can be used to pay for fees such as checked baggage fees and seat selection fees. This commission credit is only valid for one airline per year, which you must select in advance and cannot be changed.
Even if you’re more likely to take advantage of both of these benefits, it should be pretty clear that Chase Sapphire Reserve offers the best annual travel credit – it’s clearly higher, but also much more flexible and easier to use.
bottom line
You will need to do some math and figure out if the rewards you earn and the perks and perks you will use are worth more than the annual fee. For some people, a card with an annual fee will make sense. If the card is not paying off in the benefits, refunds, and insurance that you would otherwise pay for yourself, then a no-fee card is the best option.