Debunking Credit Card Myths: Is It Worth It to Pay an Annual Fee on a Credit Card?
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We spend a lot of time discussing travel rewards credit cards here at TPG. By pursuing top sign-up bonuses and strategically taking advantage of bonus categories, you can unlock fantastic redemptions like premium-class flights and luxurious hotel rooms. However, there are a number of misconceptions out there when it comes to credit cards, so today I’ll continue our new series that debunks these myths and allows you to begin planning for your next vacation. Previous entries includes having too many cards, closing a card you don’t use, how permanent of an impact an application has on your score and not paying your balance in full. Today I’ll shift away from myths that involve your credit score and tackle a different (yet still important) topic.
Myth #5: Paying an annual fee on a credit card isn’t worth it.
Let me begin with a confession. I used to believe in this myth wholeheartedly. Before I became an avid reader of The Points Guy, I wouldn’t even consider paying an annual fee on a credit card. Many of my friends and family members have expressed this sentiment to me: “Why would I pay to have a credit card when there are so many options without annual fees?”
The latter portion of this statement is accurate. There are many different credit cards with no annual fee, including some very valuable ones:
- Chase Freedom and its rotating quarterly bonus categories
- Chase Freedom Unlimited Card and its 1.5% cash-back on every purchase
- Citi Double Cash Card and its double cash back return on every purchase (1% cash back at the time of purchase with another 1% cash back as you pay for purchases)
- Amex EveryDay Credit Card from American Express and the ability to transfer points to partners
I strongly believe that everyone should have at least one no annual fee card in their wallet. However, I also strongly believe that paying an annual fee can make a lot of sense for a few important reasons:
1. The valuable points you can earn
One primary motivation for paying an annual fee is the type (or number) of points you can earn. Generally speaking, cards without an annual fee won’t provide the valuable earning potential of cards with an annual fee. There are really three aspects to this:
- Sign-up bonus: Most cards with no annual fee have smaller sign-up bonuses than those with annual fees (like the $500 bonus on the Ink Business Cash Credit Card compared to the 60,000-point bonus on the Ink Plus Business Card). Many also waive the annual fee for the first year, making the sign-up bonus “free.”
- Earning rates: Many cards without an annual fee don’t award points at the same rate as others (like the Citi Hilton HHonors Visa Signature Card awarding the same or fewer points per dollar spent than the Citi Hilton HHonors Reserve Card, depending on the category).
- Types of points: In many cases, you are restricted from earning the most valuable currencies on cards with no annual fee.
For the third point, a card with an annual fee may even allow you to “convert” lower-level points to more valuable points. The most obvious example of this involves Ultimate Rewards. If you pay an annual fee on a premium card like the Chase Sapphire Preferred Card, you can actually transfer the cash-back earned on cards like the Chase Freedom or Freedom Unlimited Card to much more valuable Ultimate Rewards points.
2. The annual credits or bonuses
Another key reason it makes sense to pay an annual fee on a credit card involves the annual bonuses that many of them provide. These can often cover most (if not all) of the card’s annual fee. Here are a few examples:
- JetBlue Plus Card (annual fee: $99) gives you 5,000 bonus points on your card anniversary (worth $50 – $70 based on TPG’s most recent valuations).
- Alaska Airlines Visa Signature credit card (annual fee: $75) gives you an annual companion fare from $121 ($99 plus taxes and fees from $22) when you renew your card; I saved nearly $500 when I redeemed this perk last year.
Even when these annual perks don’t cover the entire annual fee, there’s always the last reason…
3. The included benefits
Many top credit cards with an annual fee give you numerous benefits that can be incredibly valuable over a year. This could be a free checked bag benefit for frequent travelers from a hub airport (like the Citi / AAdvantage Platinum Select World Elite Mastercard for those of you based in Chicago or Charlotte, saving you and up to four travel companions $50 on every round-trip domestic flight). It could also be a benefit that just provides peace of mind (like the primary rental car insurance on the Chase Sapphire Preferred Card). This is also where premium credit cards like the Citi Prestige Card and The Platinum Card from American Express shine thanks to valuable perks like Priority Pass lounge access. Depending on your situation, carrying one of these cards can easily outweigh the annual fee associated with the card.
Paying an annual fee on a credit card may seem like a poor investment, but under the right circumstances, it can pay off many times over. By opening up valuable earning opportunities, annual perks and other benefits, these credit cards can give you plenty of rewards. Remember too that there are many ways to minimize the annual fees you have to pay, and as always, be sure to crunch the numbers and evaluate your own travel and spending scenario to see if paying an annual fee on a credit card makes sense.
What are your thoughts on paying annual fees for credit cards?
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