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Paying a credit card annual fee is extremely common. For anywhere from $49, $149, and up, you can get lucrative benefits and rewards as a cardholder. In fact, the highest annual fee among mainstream consumer credit cards belongs to the American Express Platinum card, recently increased to $550 a year.
Such an eye-popping number leads many consumers to wonder, does it ever make sense to pay an annual fee on a credit card? As with any financial product, the answer is sometimes yes, sometimes no. Let’s take a closer look.
Credit Card Annual Fee History
The earliest known reference to credit card annual fee was the one charged by Diners Club in 1950. According to a 2006 story in the Pittsburg Post-Gazette, Frank McNamara sold 200 such charge cards for a $3 membership fee, allowing cardholders to use the card to pay for dinner bills at (a whopping) 27 participating restaurants.
Whether it was $3 back then or $550 now, annual fees serve an important purpose in the credit card market. It allows card issuers to be able to afford to offer cardholders a large number of benefits. It also helps to distinguish the marketing and positioning of the card in the marketplace.
The general rule of thumb is that the higher the credit card annual fee, the more benefits and rewards you’ll be able to accumulate. “Reward Junkies,” or those who try to take advantage of as many credit card benefits and rewards as possible will attest to the fact that you need to maximize your card benefit usage to justify the annual fee.
Example #1 – United MileagePlus Explorer Card from Chase ($95 Annual Fee)
Let’s take a look at the recently updated United MileagePlus Explorer card from Chase. For a $95 annual fee, waived the first year, you would receive card benefits like a $100 statement credit when you apply for Global Entry or TSA PreCheck, 25% off in-flight purchases, first checked bag free, and two United Club (lounge) passes annually. The United Explorer is one of the best credit cards for flight purchases.
After the first-year fee waiver, deciding whether it is worth it to pay the annual fee depends on which benefits you take advantage of during the course of the calendar year. For example, in year two, you could use the every-four-year $100 statement credit for a Global Entry application, which would, in and of itself, justify the annual fee. But in year three, with the Global Entry statement credit gone, you’re left to rely on the other benefits to “make back” on your $95 annual fee.
That’s when your mental math has to come in. What do you value the in-flight purchase discount at? What would you value the United Club passes at? The latter has a monetary value already set at $59, which is the price of the pass if you were to walk up to the reception desk at a club to buy a day pass. But the former depends on what you buy in-flight or if you even take a United flight that year.
What if you took advantage of the lesser known features of the card, like lost luggage reimbursement, baggage delay insurance, or others? While it is not something you plan on, it is a way to easily “cover” the annual fee many times over.
Example #2 – America Express Platinum Card ($550 Annual Fee)
The equation gets trickier when the stakes are higher. Taking a look at the Platinum Card® from American Express, a $550 annual fee seems daunting to rationalize.
Off the top, the card offers $185 in Uber credits, $200 in airline fee credits, and a $100 shopping credit at Saks Fifth Avenue. If you fully took advantage of just those three items, you could have justified $485 of the $550 annual fee.
On other perks like Centurion Airport Lounge access, Amex offers shopping discounts and extended warranty protection that could easily help you make up the $65 shortfall. But this is only if you take advantage of the multitude of card benefits.
Example #3 – Starbucks Rewards Visa Card ($49 Annual fee)
Even with cards that have modest annual fees, it’s still important to run the numbers. The new Starbucks Rewards Visa Card, with its $49 annual fee, is a good example. After meeting the sign-up bonus requirements, you’ll receive 36 food or drink reward credits as a card benefit. Let’s arbitrarily set an average menu item price of $4, which would mean you would receive approximately $144 in rewards the first year.
But the second year of being a cardholder may not be as lucrative. Unless you stop into a Starbucks often enough, you’re limited in the number of ways to make back that $49 annual fee. You do get “8 Barista Picks,” which the company describes as “Food or drink Rewards curated just for cardmembers.” But the exact item is assigned rather than at your choosing, so you may not actually like the item. Either way, the approximate value would be $32 (8 items multiplied by $4 item average).
That leaves the other benefits, like a trip interruption and price protection, to pick up the $17 difference between your rewards or benefits and the annual fee. While $17 is an insignificant gap in the greater scheme of things, it is illustrative of how tricky the equation can be when figuring out the true value you’ll receive from paying an annual fee.
Example #4 – Citi Double Cash card (No Annual Fee)
Finally, sometimes paying no annual fee is a better way to go. The Citi Double Cash card is a shining example of this alternative way of thinking. With this card, you earn 1% cash back when you make a purchase and another 1% cash back when you pay your bill. If you never carried a balance, you would easily earn 2% back on every single purchase you made.
While “reward junkies” may lament the inability to devise a strategy that allows them to maximize their card spending pattern to game the rewards system, most years will instead appreciate the simplicity of this card. Instead of messing around with points or miles, you’re getting straight cash back. And with no annual fee to boot.
Is the Credit Card Annual Fee Worth It?
Bottom line, annual fees are extremely common in the credit card industry. The higher the fee, the better the card benefits and rewards. But you may have to break out an Excel spreadsheet or a 10-key calculator to truly determine whether paying an annual fee on your credit card is worth it.
The best advice is to analyze spending habits and have a specific goal in mind. If the card that will earn you the most back has an annual fee, determine how you will use your bonus. Knowing how you plan to use the bonus and the perks can help you determine if the credit card annual fee is worth it.
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