How to Tell If a Credit Card Annual Fee Will Pay for Itself

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Picking a credit card can be a tricky decision to make, especially since fees and benefits can vary significantly from card to card. Annual fees typically range from around $100 all the way up to around $500 for fancier cards with a lot o benefits, like higher rewards points, airport lounge access, and reimbursements. Depending on how much you plan to spend and travel, sometimes an annual fee can be worth it. Other times, not so much. 

How much can you earn in rewards compared to a no-annual-fee card

The best flat-rate no-annual-fee cards typically offer 2% cash back (others offer tiered rates of rewards). The first thing you should do when considering a card with an annual fee is compare the rewards you expect to earn on that card to the rewards you can earn on a no-fee card that offers a flat-rate 2% cash back. If you’ll earn more on the card with an annual fee, even after accounting for the fee, then it’s a no-brainer.

How much are the perks and benefits worth?

Another thing to consider are the perks and benefits that come with a card that has an annual fee. Some cards offer things like travel insurance, extended warranty protection, rental car insurance, and certificates for hotels or flights. This is also where things get a bit tough, though, since those benefits will have different values for different people. Really consider whether you’re going to use a benefit, but if you don’t, it’s worthless and you’re paying for nothing.

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Take an extended warranty, for example: If you buy something that offers an extended warranty and you would’ve bought an extended warranty anyway, that obviously saves you cash; but if you wouldn’t have purchased an extended warrant, it doesn’t save you anything unless the item actually breaks and you’re able to use the warranty. Think of credit card benefits like your local gym—part of their business model is luring you in with the idea of using a bunch of stuff that you probably won’t ever touch unless you’re disciplined.

It’s typically best to put benefits into three categories and consider the value of each benefit accordingly:

  1. I would otherwise pay for this benefit out of pocket. Consider the benefit at the full cost that you would otherwise pay.
  2. I might use this benefit, but would otherwise not pay for it. Discount the benefit accordingly. If you’re very likely to benefit from it, maybe only discount the benefit by 10% whereas if you’re not likely to use it, discount the benefit by 95%.
  3. I probably won’t use this benefit. Completely ignore the value of the benefit.

How likely are you to actually use that benefit?

Keep in mind that many cards offer similar benefits, but they’re not necessarily equal. For example, many premium rewards cards offer some kind of annual travel credit:

  • The Chase Sapphire Reserve offers a $300 annual travel credit that is automatically applied as a statement credit whenever you make a purchase that is categorized as travel.
  • The Platinum Card from American Express offers a $200 airline incidental fee credit that can be used for fees such as checked bags and seat selection fees. This fee credit is only valid on one airline per year that you must select up front and cannot change.

Even if you’re very likely to use both of these benefits, it should be pretty clear that the Chase Sapphire Reserve offers a better annual travel credit—it’s obviously higher, but also it’s much more flexible and easy to use.

Bottom line

You’ll need to do some math and figure out if the rewards you’ll earn and the benefits and perks you’ll use to see if they are worth more than the annual fee. For some people, a card with an annual fee will make sense. If the card doesn’t pay for itself in benefits, reimbursements, and insurances that you would otherwise pay for yourself, then a no-fee card is the better option.

 

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