Are Annual Fees Worth It?

Would you exchange $95 for earning $545 within a few weeks, guaranteed? How about $695 for $955? If you answered yes, good for you! That's what you're doing when you meet the minimum spend on a new card with an annual fee. If you answered no, then you should have answered yes. Turning away from a card with a welcome offer because that card has an annual fee is a losing strategy. In this post, we will answer age-old question, are annual fees worth it? We will go even further than answering that simple question (answer is yes) and show you why an annual fee is ALWAYS worth it in the first year. We even promise to keep the math to a minimum.

Paying The Annual Fee

When folks ask for help choosing their next credit card, it's common to see them balk at the idea of paying an annual fee for multiple cards (or any at all). For those starting out, it can be hard to wrap your mind around annual fees. Isn't award travel about traveling for free or nearly free? Well yes, but as the saying goes, you need to spend money to make money.

As we explain to newcomers, some annual fees are the price of admission to award travel. This is the case with Chase, Capital One, and Citi. Each of these banks requires you to hold a certain card so you can transfer points to transfer partners, and each of those cards has an annual fee.

But beyond that first card, annual fees are still worth it.

Welcome Offers Make Annual Fees Worth It Every Single Time In Year One

Here are a couple of examples that show that paying annual fees are always worth it in the first year.

Chase Sapphire Preferred Example

We started this post asking about exchanging $95 for $545 guaranteed when deciding if annual fees are worth it. That is what you do when you open a Chase Sapphire Preferred and meet the minimum spend. The card has a $95 annual fee and usually has a 60,000-point welcome offer after spending $4,000 in the first three months. (You can check out our review of the card for the current offer.)

After earning the welcome offer, you have at least 64,000 Ultimate Rewards points. That's 60,000 points from the welcome offer plus at least 4,000 points for spending those $4,000.

If you are concerned about paying $95 out of pocket to earn those points, you can actually cash those points out to cover the annual fee. Chase (and most other major banks) let you cash out your points at 1.0 cents per point as a statement credit. This means you can redeem 9,500 Ultimate Rewards points to cover that $95 fee. After that, you'll still have 54,500 points. Assuming you were to cash them out again at 1.0 cents per point, that means another $545 available for your pocket.

Amex Business Platinum Example

The other example we wanted to use you to show that annual fees are worth it is the Amex Business Platinum card. That card usually has a welcome offer for 150,000 Membership Rewards points after spending $15,000 in three months. If you are worried about the card's large annual fee then you can cash out your Membership Rewards at 1 cent a piece with a Business Platinum card and an Amex Business Checking account. That means you could redeem 70,000 points earned from the welcome at one cent a piece to offset the annual fee and still have at least 95,000 points. Even more if you snag the 250K offer! Plus, that doesn't account for any of the credits you can use to offset the card's annual fee.

Of course, award travelers know that redeeming points at 1.0 cents per point is a very low value. But if you need to offset all or part of a cards annual fee, you can do it. We're not here to judge and you can do that with a Business Platinum card and an Amex Business Checking account. You could redeem 70,000 points at one cent a piece to offset the annual fee and still have at least 95,000 points. Even more if you snag the 250K offer!

You Get Even More With Travel

The better use of those points is of course for travel, and specifically by transferring to airline and hotel partners. That is how we leverage credit card points to travel the world for nearly free. A $95 fee (or even a $695 fee) pales in comparison to a business class flight to Asia or taking your flying your whole family to Europe with points etc.

Are Annual Fees Worth It: ToP Thoughts

The next time you hesitate over a card's annual fee, remember this discussion. The annual fee is always worth it when you're earning a welcome offer. You can always reassess the card's value in the second year and beyond. For help with that analysis, check out this post.

Have any questions about whether your card's annual fee is worth it? Share your question in our Facebook group to learn more!