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Credit Card Annual Fees: When Does Paying Make Sense?

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Update: Some offers mentioned below are no longer available. View the current offers here:  American Express EveryDay Credit CardAmerican Express EveryDay Preferred Credit CardCiti ThankYou PremierCiti ThankYou Preferred

Maximizing award travel means not only getting the most out of your points and miles, but also limiting your cash expenses. To earn big credit card sign-up bonuses, you often have to strike a balance between your rewards and the amount you pay in annual fees. Today, TPG Contributor Nick Ewen offers his analysis of how to find that balance with some popular travel rewards credit cards.

Many travel rewards credit cards come in two versions: a basic card with no annual fee and a limited sign-up bonus, or a premium card with an annual fee, a larger sign-up bonus, and enhanced benefits. Sometimes annual fees are justified by the extra benefits that come with them, but sometimes they’re not. Deciding between the two is a common dilemma for points and miles enthusiasts.

Previously I’ve compared several fee-based rewards cards with their no-fee counterparts:

Today, I’ll go look at some other popular credit cards and discuss important factors to consider as you weigh your options.

Amex
The Amex Everyday and Everyday Preferred cards are a perfect example of fee vs. no-fee options.

American Express Everyday Preferred vs. American Express Everyday

Earlier this year, American Express added two new credit cards to its already substantial lineup: the Everyday and Everyday Preferred cards. Both of these accrue full Membership Rewards points, though they have some different benefits. Here’s a quick run-down of the major differences:

  Everyday Everyday Preferred
Annual Fee $0 $95
Sign-Up Bonus 10,000 points after spending $1,000 in first 3 months 15,000 points after spending $1,000 in the first 3 months
Bonus Categories 2x points at supermarkets (up to $6,000 per year) 3x points at supermarkets (up to $6,000 per year); 2x points at U.S. gas stations
Monthly Bonuses 20% more Membership Rewards points after 20 or more purchases in a billing period 50% more Membership Rewards points after 30 or more purchases in a billing period
Other Benefits One free year of Amazon Prime One free year of Amazon Prime

As you can see, the Everyday Preferred card comes with some substantially greater benefits than those the fee-free Everyday card. But when does it make sense to incur the annual fee?

Analysis:

Let’s start with the sign-up bonus. For the exact same amount of initial spending, you get an additional 5,000 Membership Rewards points. Based on TPG’s November valuations (which pegged Membership Rewards points at 1.9 cents apiece), the extra 5,000 points are worth $95. Thus, in year one the sign-up bonus alone is enough to cover the annual fee. Since the Everyday Preferred card offers better earning rates at supermarkets and gas stations, it makes the most sense to start with the Everyday Preferred.

After year one, you’ll need to consider your spending patterns in a typical year to decide if it still makes sense to incur the annual fee. It all boils down to how many more Membership Rewards points you can earn in a given year on the Everyday Preferred. If your spending gets you more than 5,000 additional points, then you’ll cover the annual fee (again, valuing Membership Rewards points at 1.9 cents each).

You can do this in one of the following ways:

  • Spend more than $5,000 at supermarkets in a year
  • Spend more than $5,000 at gas stations in a year
  • Reach 30 transactions in one or more billing cycles
  • Some combination of the three options above

For an example of how these things can be combined, suppose you typically spend $300 groceries each month, $200 on gas, and $2,000 on all other credit card purchases. Here are your earnings for a year:

Everyday Preferred

  • Monthly Earnings: ($300 x 3 points) + ($200 x 2 points) + ($2,000 x 1 point) = 3,300 points
  • Yearly Earnings: ($3,600 x 3 points) + ($2,400 x 2 points) + ($24,000 x 1 point) = 39,600 points

Everyday

  • Monthly Earnings: ($300 x 2 points) + ($2,200 x 1 point) = 2,800 points
  • Yearly Earnings: ($3,600 x 2 points) + ($26,400 x 1 point) = 33,600 points

With the Everyday Preferred you’ll earn 6,000 more Membership Rewards points, worth $114, which more than covers the $95 annual fee. This disparity increases if you hit the 30 transaction threshold for even one month. In the above example, your 20% bonus on the Everyday card would net you 560 additional Membership Rewards points, while the 50% bonus on the Everyday Preferred card would net you an additional 1,650 Membership Rewards points. This difference of 1,090 points is an added value of $20.71, giving you even more incentive to incur the annual fee.

Verdict: The higher sign-up bonus on the Everyday Preferred card makes it the clear winner in year one. After that, the decision is a little murkier. However, I still think the Everyday Preferred card is the better option unless you spend very little at gas stations & grocery stores. Again, all you need is 5,000 additional Membership Rewards points to cover the annual fee, and with the bonus categories and monthly transaction bonus, that should be relatively easy.

Citi ThankYou Premier vs. Citi ThankYou Preferred

Citibank offers fee and no-fee credit card options in the ThankYou Rewards program. Here’s an overview of these two cards:

  Preferred Premier
Annual Fee $0 $125 (waived in year one)
Year One Sign-Up Bonus 20,000 ThankYou points after spending $1,500 in the first three months 20,000 ThankYou points after spending $2,000 in the first three months
Year Two Sign-Up Bonus None 30,000 ThankYou points after spending $3,000 in the first three months
Bonus Categories 2x ThankYou points on dining and entertainment purchases 3x ThankYou points on dining and entertainment purchases; 2x ThankYou points on airfare, hotel, and travel agency purchases
Redemption Redeem ThankYou points for travel & other rewards at 1 cent apiece Redeem ThankYou points for travel (with a 20% discount); transfer ThankYou points to 10 airline & hotel partners
Foreign Transaction Fees 3% None

Just like the previous comparison, the Premier card offers some significant advantages over the Preferred card. But when does the annual fee make sense?

Analysis:

The most important consideration when comparing these two cards is that the points they earn are fundamentally different, even though both cards are part of the ThankYou Rewards program. The points earned on the no-fee Preferred card are “standard” points that can be redeemed for travel, gift cards, merchandise, or cash. They have a fixed value of 1 cent apiece.

Points earned on the Premier card are “premium” points. They can also be redeemed for travel, but you get a 20% discount, making each one worth 1.25 cents apiece. In addition, you can transfer them to 9 airline partners and Hilton HHonors. This added flexibility led TPG to peg these points at 1.6 cents apiece last month.

As a result, the Citi Premier is the clear winner in year one. While both cards earn a sign-up bonus of 20,000 ThankYou points, those earned on the Premier card are worth 60% more ($320 vs. $200). The Premier card comes out on top in the second year as well due to the staggered sign-up bonus. Those 30,000 ThankYou points are worth $480 (or $355 when you factor in the $125 annual fee). Since there’s no additional sign-up bonus on the Preferred card, you still get more value out of the Premier card even when the annual fee kicks in.

After that, the equation again boils down to your typical yearly spending patterns. Using TPG’s valuation of 1.6 cents apiece for the “premium” ThankYou points, incurring the annual fee makes sense if you:

  • Spend more than $4,464.29 per year on dining and entertainment
  • Spend more than $5,681.82 per year on airfare, hotel, and travel agency purchases
  • Spend more than $20,833.33 per year on non-bonus category purchases
  • Spend more than $4,166.67 per year on foreign transactions
  • Some combination of the options above

In all of these cases, the spending will earn you enough value (or save you enough in foreign transaction fees) to more than cover the annual fee. If you peg the premium ThankYou points at 1.25 cents apiece (based on their value when redeemed directly for travel), the numbers above increase, and the annual fee makes sense if you:

  • Spend more than $7,142.86 per year on dining and entertainment
  • Spend more than $8,333.33 per year on airfare, hotel, and travel agency purchases
  • Spend more than $50,000 per year on non-bonus category purchases

Verdict: Just like the American Express Everyday cards, the premium version of the card is the clear winner in year one, though in this case, the Premier is also the clear winner in year two. After that, it depends on how much you spend in a given category and whether or not you agree with TPG’s valuation of 1.6 cents apiece. If you can routinely get more value out of ThankYou points, then the Premier card becomes more lucrative. If you generally redeem at lower values, the Preferred card is likely the better option.

Ven
Are you sensing a pattern? The decision between fee and no-fee cards depends on your spending patterns. Photo courtesy of Shutterstock.

Capital One Venture Rewards vs. Capital One VentureOne Rewards

These two Capital One cards can be confusing by virtue of their names alone! The Venture Rewards credit card is the fee-based version, while the VentureOne Rewards credit card does not incur an annual fee. Here’s an overview of the benefits on these cards:

  VentureOne Venture
Annual Fee $0 $59 (waived in year one)
Year One Sign-Up Bonus 20,000 miles after spending $1,000 in the first three months 40,000 miles after spending $3,000 in the first 3 months
Everyday Earning 1.25 miles per dollar on all purchases 2 miles per dollar on all purchases
Redemption Each mile is worth 1 cent Each mile is worth 1 cent
Foreign Transaction Fees None None

Analysis:

Just like the other two scenarios above, the Venture card is the clear winner in year one, courtesy of its waived annual fee and higher sign-up bonus. The additional 20,000 miles you earn are worth $200 toward travel, gift cards, or merchandise. In addition, the higher earning rate on everyday purchases gives you 60% more miles on the Venture card than the fee-free VentureOne card.

The results after year one again depend on your spending pattern, but in this case the only question is amount; where you use the card is irrelevant. Since you earn 0.75 miles more per dollar spent on the Venture card, the break even point (where the additional value earned covers the $59 annual fee) is:

$59 / 0.75 cents per mile = $7,866.67

In other words, if you plan on charging more than $7,866.67 on the card in a calendar year, the higher earning rate on the Venture card will more than cover the annual fee:

Verdict: This comparison is actually much more straightforward, given that the two cards are basically identical aside from the sign-up bonus and standard earning rate for everyday purchases. The Venture card with the annual fee waived is the better option in year one. After that, if you spend more than $7,866.67 per year, you should keep the Venture card. Otherwise, stick with the fee-free VentureOne card.

Final thoughts

I used to not understand why people would pay an annual fee for a credit card. However, I have since come to recognize the value of premium cards. I hope these comparisons have shed some light on when incurring an annual fees makes sense compared to sticking with the free version of a card.

Do you tend to stay away from cards with annual fees?

The Amex EveryDay® Preferred Credit Card from American Express

Apply Now
  • Earn 15,000 Membership Rewards® points after you use your new Card to make $1,000 in purchases in your first 3 months.
  • Use your Card 30 or more times on purchases in a billing period and earn 50% more points on those purchases less returns and credits. Terms and limitations apply.
  • 3x points at US supermarkets on up to $6,000 per year in purchases (then 1x); 2x points at US gas stations; 1x points on other purchases. Terms and limitations apply.
  • You can use Membership Rewards® Pay with Points to pay for all or part of your flight, hotel booked and paid in advance, vacation or cruise booking through amextravel.com.
  • 0% intro APR on purchases and balance transfers for 12 months, then a variable rate, currently 13.24% to 23.24%, based on your creditworthiness and other factors.
  • Terms and Conditions apply.
  • See Rates & Fees
Intro APR Regular APR Annual Fee Foreign Transaction Fee Credit Rating
0% for 12 months 13.24%-23.24% Variable $95 2.70% Excellent Credit