Credit cards have revolutionized the way we manage our finances, offering convenience and a plethora of benefits. As you delve into the world of credit cards, you’ll come across options that require an annual fee.
While the idea of paying an annual fee might raise eyebrows, these cards often come with a range of enticing perks and rewards that can make the fee worthwhile for specific individuals.
In this blog post, I will cover the pros and cons of paying an annual fee so that you can decide if getting or keeping an annual fee card makes sense for you.
Times that it makes sense to pay an annual fee
You are looking for travel awards
If you’re a frequent traveler or someone who loves exploring new destinations, a credit card with an annual fee can be a game changer. These cards typically offer top-tier rewards and travel focused benefits that can make your trips even more rewarding.
For example, a premium travel credit card might provide multiple points per dollar spent on travel and dining, allowing you to accumulate rewards faster than with a no annual fee card.
Some credit card issuers have two versions of the same credit card. One version has no annual fee while another version has an annual fee. The no annual fee card most of the time doesn’t have as generous of offerings as the annual fee card.
For instance, the Capital One VentureOne Rewards Credit Card has no annual fee. With the card, you earn 1.25 miles for each dollar spent.
The annual fee version of the card is the Capital One Venture Rewards. The card has a $95 annual fee. With the card, you get 2x the points on all purchases.
You also get some other travel perks like auto rental insurance, a $100 Global Entry/TSA Precheck credit and lost luggage reimbursement.
You want a large sign up bonus
Credit cards that come with annual fees often entice new customers with generous sign up bonuses. These bonuses can be significantly higher than those offered by no annual fee cards, making the fee well worth it, especially if you meet the required spending threshold to qualify for the bonus.
For example, the Capital One VentureOne Rewards Credit Card with its no annual fee at the time of this writing has a 20,000 point sign up bonus.
While the Capital One Venture Rewards card with its $95 annual fee has a 75,000 point sign up bonus.
Capital One points are worth 1 cent per mile. So, if you get the annual fee card, you are still $455 ahead versus the no annual fee card after the first year. $750 – $95 annual fee = $655 – $200 no annual fee amount = $455.
You value high end travel perks
When you pay an annual fee on a travel card, you are going to get various perks with the card.
Just a few of the perks that you may get with an annual fee travel card include: luggage reimbursement, trip cancellation/interruption insurance, primary rental car insurance, no foreign transaction fees, and free checked bags.
For example, the Chase Sapphire Preferred has primary rental car insurance. This coverage pays for damage or theft of the car. So, when you pay for the rental with the card, you are automatically covered with the insurance if you deny coverage from the rental car company.
If you get rental car insurance from the rental car company, it will cost you $10 to $60 a day. This one perk can more than make up for the cost of the annual fee.
Higher end cards like the Chase Sapphire Reserve and American Express Platinum card offer more elite perks like airport lounge access, elite status at hotels, Global Entry/TSA Precheck, and rideshare credits.
You want to build credit
For individuals with damaged credit, secured credit cards are a common option to rebuild creditworthiness. Some secured cards come with annual fees, but the benefits they offer can significantly aid in credit rebuilding efforts.
By using a secured card responsibly and making timely payments, cardholders can improve their credit scores over time, eventually qualifying for unsecured credit cards with better terms and conditions.
Another option is by getting a card that has a low annual fee but is geared towards people with poor/fair credit. For example, the Mission Lane Visa Credit Card has a $0- $59 annual fee depending on your credit score.
When it doesn’t make sense to pay an annual fee
As you can see, an annual fee can more than pay for itself but there are times when having a card with an annual fee doesn’t make sense. So, let’s take a look at some examples.
Costly expense for infrequent users
For every card that has an annual fee, you have to spend enough on the card to recoup the cost of the annual fee. For example, if you have a card with a $95 annual fee and you earn 2% back for your expenses.
You would have to spend $4,750 to equal the cost of the annual fee ($4,750 x .02 = $95). If you spent a total of $6,000 for the year on the card, you would earn $120. So, you would be $25 ahead for the year.
If you had a no annual fee card that earned 1.5% back and you spent $6,000 for the year, you would be $90 ahead ($6,000 X 1.5% = $90). You have to do the math to see if an annual fee card makes sense for you.
You don’t use the available perks
As I mentioned before, cards that come with an annual fee are going to have different perks. For example, the Chase Sapphire Preferred has a $95 annual fee.
It comes with numerous perks including: primary rental car insurance, trip cancellation/interruption insurance, a $50 annual hotel credit, GoPuff monthly statement credit and Instacart benefits to name a few.
If you aren’t going to get $95 of value using the credit card perks, then you have to decide whether you want to get the card or not.
Benefits go away after the first year
Some annual fee credit cards have offers that are only good for the first year and then go away after that. Some examples would include sign up bonuses, as well as, perks with certain companies.
You need to factor in the loss of these perks with your overall usage to see if it still makes sense for you to keep the card.
You carry credit card debt
Perks and rewards are great for people that pay off their credit card bill each month. If you are carrying credit card debt, then getting a new card shouldn’t be on your list of things to do.
It doesn’t make good financial sense to be paying 20% or more in interest on a card and earning 2% back on another card.
Final Thoughts
As you can see, there are pros and cons in having a credit card that has an annual fee. No matter if you are thinking about getting a card with an annual fee of $75, $295 or $695. You have to determine if you will get the value out of the card to get or keep the card.
If you decide that you will get the value out of it, then get the card. If you think that you won’t get the value out of the card, then you probably should consider getting a no annual fee card.
To learn more about travel, saving on travel and travel credit cards, you can go to my blog by clicking on the link.
