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Does It Make Sense to Pay an Annual Fee?
Have you ever vowed to sign up for a rewards credit card, but changed your mind after seeing the annual fee? If you have, you’re certainly not alone. Although the top rewards cards offer plenty of value, many people don’t want to pay an annual fee for the privilege of having one.
At the same time, some rewards enthusiasts don’t mind paying an annual fee every now and then. Why? Because, despite the upfront cost, they feel they’re getting more than enough value in return. This post aims to explain why an annual fee makes sense sometimes, and how you can determine when an annual fee is worth it.
What Is an Annual Fee?
Annual fees are automatically charged once a year by the credit card provider to account for all the rewards and benefits of the card. Since many rewards cards are fee-free, it’s easy to wonder why others charge a fee to begin with. As a general rule, however, the rewards cards with the biggest perks and signup bonuses are the ones that charge an annual fee. And if you want the most bang for your buck, you’ll be asked to pay for it.
Most annual fees charged by rewards cards are somewhere between $59 and $95. However, certain premium cards charge annual fees as high as $450 or more. Annual fees pay for:
- Credit card perks: While all cards offer a different set of benefits, many rewards cards that charge an annual fee come with special perks such as price protection, extended warranties, and free FICO scores.
- Insurance and other protections: Travel credit cards specifically are known for offering pricey insurance coverage as a cardholder perk. This coverage can include primary rental car coverage, trip cancellation/delay coverage, and emergency travel assistance.
- Membership in a rewards program: If you charge a lot of expenses to your credit card, membership in a rewards program can help offset the cost of your card’s annual fee.
While credit cards don’t actively advertise all of the extra benefits they offer, they are certainly available. To learn more, read our post on Eight Hidden Benefits of Credit Cards.
How to Tell When an Annual Fee Is Worth It
While there are no hard and fast rules that dictate when paying an annual fee is worth it, it’s fairly easy to tell. For the most part, paying a card’s annual fee is worth it if you’re receiving more back than you are paying in.
It’s also worth noting that most of the top rewards credit cards waive the annual fee for the first year, which gives you time to see if the added cost is worth the benefits. Once the annual fee is due, however, these tips can help you decide.
Most of the time, paying an annual fee is worth it when:
- You’re earning enough rewards to offset the annual fee. If you’re spending enough on your card each month to rack up plenty of rewards, then paying an annual fee might make sense.
- You’re using your card’s “extra benefits” frequently enough.
- Your card offers services you needed to pay for anyway. If you need to purchase primary auto rental coverage each time you get a rental car, for example, it might be wise to get a rewards card that offers that coverage as a cardholder perk instead.
A Real-Life Example
To show how and when paying an annual fee might be worth it, let’s imagine you just signed up for the Chase Sapphire Preferred® Card and met the minimum spending requirement. The annual fee is $95, and the sign-up bonus alone is worth $1,000 in travel when you redeem through Chase Ultimate Rewards® (earn 80,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. Plus earn up to $50 in statement credits towards grocery store purchases).
But, should you pay the $95 annual fee?
To show how and when paying an annual fee might be worth it, let’s imagine you just signed up for the Chase Sapphire Preferred® Card and met the minimum spending requirement. The annual fee is $95, and the sign-up bonus alone is worth $1,000 in travel when you redeem through Chase Ultimate Rewards® (earn 80,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. Plus earn up to $50 in statement credits towards grocery store purchases.)
If you spend more $5,000 per year on travel or dining…
Yes. Since you earn two points per dollar spent and you can redeem your points for gift cards or cash back, $5,000 in travel and dining spending will net you $100 in value.
If you spend more than $10,000 per year on regular purchases…
Yes. Since you earn one point per dollar spent on all purchases, annual spending on the card of $10,000 means you’ll score enough points for a $100 gift card or $100 in cash back.
If you rely on your card’s valuable perks…
Yes. Since primary auto rental coverage or even trip cancellation insurance can easily cost a lot more than $100 each time you buy, using this coverage just once a year means the card pays for itself.
With all of that being said, paying an annual fee might not be worth it if you don’t spend much within your card’s valuable bonus categories, which in the case of the Chase Sapphire Preferred® Card, is travel and dining. Meanwhile, if you don’t use your card often, you may find little value in the points you earn anyway.
Do you ever pay annual fees on credit cards? What perks make an annual fee worth it for you?
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