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We are a dedicated group of financial professionals, enthusiasts, and researchers, working to keep you informed about the ins and outs of credit card usage and managing your own credit. Armed with knowledge, you can change your financial world and live a better life!

Is My Annual Fee Worth It?

February 12, 2019

 

Does It Ever Make Sense To Ignore Credit Cards With No Annual Fee? Is My Annual Fee Worth It?

 

Is an annual fee worth it? There was a time when I would have scoffed at all annual fees. Why pay a creditor for the privilege of putting their card in my pocket? What nonsense! Besides, aren’t they charged to people with damaged credit, for whom the amount is a slap on the wrist for being bad? The answer to that is “sometimes”.

 

Credit cards ‘no annual fee’ is not always best. Believe it or not, there might be a time when choosing a credit card that has an annual fee over a credit card that does not have an annual fee might be in your best interests. It’s true. How? Well, it depends on the perks that come with the card. The fees on high-end cards are similar to VIP admission charges. So, is an annual fee worth it? If it gives you enough privilege. Sure, you are out some cash, but what you gain in ex-change can be well worth the price. To understand if annual fees are worth it, understand how they work.

 

Some Basics

 

Annual fees range dramatically, from less than $50 to $500 and beyond. Always carefully read the rewards program that comes with these fees. You will want to know exactly what you get for the expense, and calculate its worth to you.

 

Consider some times when you have to spend money to get money – or at least have the potential to spend money. You might be considering credit cards at two home improvement stores that you frequent. One card offers a zero APR for 12 months on all purchases. The other card offers you 5% off every time you use it. Which is better? Well, it depends on you and your habits. If you are one to pay your card off each month then it’s a no brainer – you want the 5% off card. But if you tend to do big projects and carry the balance for a few months as you pay it off, then the zero APR card is better for you. Is the zero percent APR credit card always best?

 

What if one of those cards had an annual fee and one was one of the credit cards with no annual fee? Say the 5% off card had a $29 annual fee. Is it worth it? Well, on this card for every $100 you spend you will save $5. So, if you spend $600 in a year you would save $30. That’s enough to cover the annual fee. Thus, this annual fee would be worth it to you if you know you are going to spend $600 or more.

 

Let’s look at another scenario.

 

Card #1 gives you 1% cash back on all purchases and 5% cash back on gas and groceries in the first 6 months of card opening. This card has a sign up bonus of $200 and has no annual fee.

 

Card #2 gives you 1% cash back on all purchases, 3% cash back on gas and at select U.S. department stores, and 6% at U.S. supermarkets on the first $6000 in purchase a year . This card has a sign up bonus of $250 and an annual fee of $95.

 

Let’s say that in a year you spend $6000 on groceries, $3,000 in gas, and another $5,000 in other purchases on your card. A total of $14,000 a year.

 

After 6 months, assuming you had spent half the amount in each of the above listed categories:

 

Card #1 has earned you $225 in cash back on gas and groceries, $25 in cash back on other purchases, and a sign up bonus of $200, totaling in $450 with no annual fee.

 

Card #2 has earned you $180 in cash back for groceries, $45 in cash back for gas, and $25 cash back on other purchases. In addition, it earned you an opening bonus of $250, earning you a total of $500. After paying your annual fee with your cash back, this card has paid you a total of $405.

So after 6 months, card #1 looks great, right?

 

Now, let’s look at 1 year of usage.

 

Assuming that you only spent half the amounts mentioned above in the first 6 months:

 

Card #1 would have earned you $225 in bonus categories, $95 in 1% cash back, and a $200 opening bonus. This brings you to a total of $520 in cash back.

 

Card #2 would have earned you $450 in bonus categories, $50 in 1% cash back, and a $250 opening bonus. This brings you to a total of $750 in cash back. After redeeming some of your cash back towards your annual fee, you will still be left with $655 for you to enjoy.

 

Now even in the second year, once there is no opening bonus on either card, Card #2 will be more rewarding, provided that the above mentioned spending is done, and it continues to be so for the life of the card.

 

So as you see, sometimes an annual fee card is still your best choice over credit cards with no annual fee – you have to look at other factors as well.

 

Do you love airport lounges and make use of them whenever you travel the globe? You know that access (if you can even get in) is around $50 per day. Ten visits per year and you’ll break even for the card that charges the top price – and that’s just for that one service.

 

The deals you get on car rentals and hotel rooms can also be simply deducted from the price. Save $100 per day on the combination of those two and you’ll make money with the fee in less than a week.

 

It Just Might Be Worth, But That Doesn’t Mean You Have To Like It.

So, are annual fees worth it for a credit card – maybe. But you still hate it. Okay, you really want all the good stuff and you want to reduce the membership fee too. I get that. Here’s what you can do.

 

·         You can renegotiate out of it. Never be afraid to pick up the phone and ask for what you want. Perhaps the fee doesn’t kick in until your second year with the card, but you would really rather it be waived. Ask. They can only say no. But don’t stop there – maybe they have to charge it, but are willing to give you extra airlines miles to make up for the cost. Stay on the phone, be nice, and cover all possibilities. If you’re a good customer, chances are they want to both retain you, so are willing to be flexible.

 

·         You may be able to downgrade. Creditors typically offer a variety of cards with different membership fees. If you have one that is too rich for your blood, ask if you can downgrade to one of their products that is similar, but not quite so costly or even free. A $95 fee may be within your budget, and it may provide many of the rewards associated with a card that costs ten times as much. Again, get on the phone and ask the company’s representative what you can do to remain a customer while also getting the most bang for your buck.

 

So is annual fee worth it? No longer will I say “no way” to all, because I have enjoyed their benefits on multiple cards. Now it’s your turn to decide, is an annual fee worth it on a credit card.

 

 

 

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