Is My Annual Fee Worth It?

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.