Deciding Whether to Pay a Credit Card’s Annual Fee

Travel on Point(s) has partnered with CardRatings for our coverage of credit card products. Travel on Point(s) and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.

 

Many people balk at the idea of paying an annual fee for a credit card. Why do that when so many cards don't charge any annual fee? The answer is simple: because it is generally worth it. The not so simple part is figuring out which cards are worth their annual fees and which aren't.

The analysis also depends on whether you are looking at opening a new card or paying the annual fee for keeping the card another year. Below, we cover some factors you should consider.

Initial Thoughts

Simply put, annual fees are the price we pay to play the points & miles game. Many of the best credit cards come with annual fees. These include the Chase Sapphire Preferred and the Citi Premier, two mainstays of anyone collecting Ultimate Rewards (URs) or ThankYou Points (TYPs).

Deciding whether a card's annual fee is worth it boils down to weighing two sides of a scale. On the one side is the annual fee. On the other side, are the card's benefits. These can include the sign-up bonus in the first year, lounge access, the card's earning power on bonus categories, credits or discounts for certain goods or services, and many other perks.

Since a card's sign-up bonus alone can justify the annual fee, we split the analysis between new cards and existing cards.

Opening a New Card

We all know that sign-up bonuses are the fastest way to earn points. It's a lot faster to earn 60,000 URs by spending $4,000 in three months with the Chase Sapphire Preferred‘s current offer than it is to maximize the CSP's bonus categories. To earn those same 60,000 URs with dining expenses, you would have to spend $20,000 earning 3x per dollar! The same goes for the Citi Premier's all-time high offer of 80,000 TYPs and the many Amex Platinum offers ranging from 100,000 to 150,000 Membership Rewards.

These large amounts of points make it easy to justify these card's annual fee for the first year. The CSP's 60,000 UR sign-up bonus is worth $750 when redeeming through the Chase Ultimate Rewards portal at 1.25 cents per point. This means you're paying $95 to earn $750. This sounds like an easy decision. And of course, we all know that we can get way more than $750 in value out of 100,000 URs through valuable transfer partners.

While the sign-up bonus alone justifies the annual fee, the card's additional benefits are the icing on the cake for that first year. You can always product change your card to one with no annual fee when the fee posts the following year. Even then, product changing your card should not be your primary option. First you should check to see if you are eligible for any retention offers. Retention offers are when a bank offers you a statement credit or a number of points in exchange for you keeping your card open for another year.

If you are not eligible for retention offers, then you must decide whether it is worth keeping the card and paying the annual fee again.

Keeping a Card

Deciding whether to pay the annual fee after the first year is a bit trickier. You no longer have a hefty sign-up bonus tipping the scale. Now we need to look at the card's benefits and overall usefulness to you. Here are some popular credit card benefits that can help justify or at least offset an annual fee:

  • Lounge access
  • Free night certificate
  • Hotel status
  • Free checked bag
  • Statement credits for goods and services
  • Primary car rental insurance

It's worth highlighting how to think through some of these benefits.

Lounge access is very popular, and for good reason. It can be a great money saver, not to mention how nice it is to wait for your flight somewhere that is a little quieter and hopefully less crowded. That said, a lot of cards offer lounge access, with Priority Pass being the most popular. So lounge access could be an important factor for someone who does not have any other cards offering lounge access. But even then, you must ask yourself whether you have used or expect to use airport lounges enough to offset that card's annual fee.

Free night certificates are a common benefit for some hotel credit cards. Based purely on numbers, it is usually worth paying the annual fee in exchange for a free night certificate. It's easy to find hotel rooms where the cash price far exceed the annual fee you paid to receive the free night certificate. However, you should consider the brand in question. For example, if you have Marriott free night certificates but have become a Hyatt loyalist, how likely are you to stay at a Marriott property?

Hotel status is similar here. Does your card grant you elite status for the brand you plan to stay with the most? Or at least often enough to justify the annual fee? How many free breakfasts or room upgrades would you need to justify paying the card's annual fee?

Lastly, remember to consider the effort it takes to maximize your benefits. For example, Amex has been introducing several new statement credits to its cards as benefits. However, many of these are small monthly amounts that require you to remember to use them each month. We all value time differently, so just make sure to factor that in to your thought process.

Final Thoughts

Annual fees should not scare anyone away from earning points and miles. This is especially true when opening a card with a good sign-up bonus. But at the same time, we should all keep track of our annual fees are reassess the utility of our cards every year when a fee posts.

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

 

Travel on Point(s) has partnered with CardRatings for our coverage of credit card products. Travel on Point(s) and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.

Affiliates