Editorial Policy

How to Size Up a Rewards Card Annual Fee

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By Eva Norlyk Smith, Ph.D.
October 18, 2011

QHi Eva,
I’m thinking about signing up for an airline rewards card and just received an offer in the mail for a card with a $50 annual fee. When I looked online, I noticed that most airline cards have even higher annual fees. What makes these annual fees worth it? I love the idea of earning free flights, but I’m not really a big spender. Do I have to be to make the yearly fee worth it? — Hailey

AHi Hailey,
Credit cards are a lot like cars. Some come with more bells and whistles and so cost more. However, you’re smart to be skeptical: Just because a credit card charges an annual fee doesn’t necessarily mean it offers greater value.

As you suspect, the relative value of a credit card with an annual fee depends on each person’s unique financial situation. It also depends on the card itself. Depending on the card, the fee amount isn’t always in sync with the benefits offered.

Calculating whether an annual fee is worth it can be fairly straightforward, but it can also get very complicated. Let’s take a look at some examples, and you’ll see what I mean.

Example No. 1: Credit cards with apples-to-apples comparisons.
With some credit cards, it’s a straight apples-to-apples comparison to see which card offers the best value for your situation. Ask Eva

Many generic travel rewards cards, for instance, come with a no-fee version and an annual fee version. To help you decide whether the annual fee version is worth the added expense, calculate how long it will take you to earn back the annual fee.

For example, the Capital One Venture Rewards card comes with a $59 annual fee (waived the first year) and offers two rewards points per dollar spent. There is also a no-fee version of the card, but it offers just one and a quarter points per dollar spent.

Each Capital One point is worth one cent, so that means you will earn back two cents per dollar spent with the annual fee version of the card and one and a quarter cents with the no-fee version. That’s a three quarters of a cent difference between the two cards (2 cents minus 1.25 cents equals .75 cents or $.0075).

If you divide that difference from the total annual fee, you will see how much you need to spend to earn back the annual fee. In this case, $59 divided by $.0075 equals $7,866.

If you charge this much to your credit card within, say, three to six months, the annual fee is well worth it, because, for the rest of the year, you will earn an extra three quarters of a cent back on every dollar you spend. On the other hand, if you barely charge that much in a year, the $59 fee is not going to be worth the added expense.

Example No. 2: Annual fee credit cards with sign-up bonuses.
Unfortunately, weighing the benefits of getting a card with an annual fee is often not that simple. Card issuers tend to sweeten the deal for cards with annual fees by adding enticing sign-up bonuses, which can save you significant money — in the first year.

Take the Chase Sapphire Preferred credit card, for example. It comes with a very generous sign-up bonus: 50,000 bonus points for cardholders who charge $3,000 in the first three months.

The card also lets cardholders use 20 percent fewer points when redeeming rewards earnings, so, according to Chase, those 50,000 bonus points translate into the equivalent of $625 in free travel—more than enough to make you forget about the $95 annual fee, conveniently waived the first year.

If you disregard the generous sign-up bonus, however, the rewards earnings on the card may make you think twice about paying the annual fee. For $95 a year, you still only get two points per dollar spent on airfare purchases and hotels, and one rewards point per dollar spent on all other purchases.

You do get a discount on the number of points you need for travel and you can transfer points to other frequent traveler programs, so the fee may be worth it if you travel a lot. But if you’re not a frequent traveler, the card doesn’t offer that much extra value for the annual fee.

Of course, some consumers find it worthwhile to apply for a rewards card just to get the bonus points and then cancel the card down the line. However, that’s a risky sport, which can hurt credit scores, and it’s not for everyone.

Example No. 3: Annual fee credit cards with extra perks.
In some cases, the benefits from paying an annual fee come in the form of added-value perks.

For example, the American Express Gold Delta Skymiles card comes with a $95 annual fee (also waived the first year). However, cardholders also get a $99 companion travel certificate each year they hold the card, a benefit that may make up for the annual fee.

Just one step up from that, the American Express Platinum Delta Skymiles card charges a $150 annual fee, but you also get a free companion ticket certificate every year, making the benefits of this card much more valuable. Both cards also come with added benefits and sign-up bonuses, which can add up as well.

Enough already? If your eyes glazed over, and I lost you somewhere back in example number one, I don’t blame you. Weighing the benefits of annual fee credit cards vs. no-fee cards can quickly get way too complicated. The bottom line, however, is that the benefit of any credit card must be seen in the context of each person’s individual finances.

So here is a simple rule of thumb: Follow your gut. If paying a $50 annual fee just seems too expensive to you, that is exactly what it is. And you don’t need a long-winded columnist to tell you that.