Should I Use a Rewards Credit Card If It Incurs Fees?

Sep 6, 2015

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TPG reader Chris tweeted me wondering when it makes sense to pay with a card that incurs extra fees:

@ThePointsGuy — “Can you explain if/why I should use a rewards credit card that adds on a (3%) transaction fee for using the card?”

You can use a credit card to pay for pretty much anything these days, but depending on your purchase, there’s sometimes an added fee. For example, if you pay rent with your credit card, you’ll typically be charged extra.

Try to think of points and miles as money. It only makes sense to pay a fee if the points you earn in the process are more valuable. Points have different values to different people; if you use them for cheap, domestic travel in economy, the value is going to be a lot lower than if you redeem for expensive premium tickets (like using 67,500 AAdvantage miles to fly in first class on Cathay Pacific to Asia).

Make sure the rewards you earn outweigh any extra fees. Image courtesy of Shutterstock.

If I asked for three pennies and said I would give you two pennies in exchange, you would say no, because it doesn’t make sense. You have to think of the credit card situation in a similar manner. A 3% fee means that for every dollar you spend, you’re paying 3 cents extra. If the miles you earn are only worth 2 cents each, it’s not a good deal.

Here are my most recent valuations for points earned on a few different rewards credit cards:

  • Chase Ultimate Rewards — 2.1 cents
  • Starwood — 2.5 cents
  • American Express Membership Rewards — 2.0 cents

If you’re earning one point per dollar, then naturally you wouldn’t want to pay a fee higher than the value of those points. If you’re earning a bonus (like the 2 points per dollar earned for travel and dining purchases on the Chase Sapphire Preferred), then your overall return will naturally be higher.

In general, make sure you’re getting more value in points earned than what you’re paying as a fee. If the transaction fee exceeds these bonus returns, it’s probably not worth using that credit card. There is one notable exception, which is when you risk missing out on a sign-up bonus by failing to meet spending requirements. If the points or miles you’re earning are getting you closer to a huge bonus, then paying a little extra may be worthwhile.

If you have any other questions, please tweet me @thepointsguy, and follow me on Instagram.

Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

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