Erica and Jordan at the The Worth Project have the goal of sharing their personal finance experience to help readers improve their financial lives. We regularly partner with companies that share that same vision. Some of the links in this post may be from our partners. Here's how we make money.
A few years ago, Jordan and I were looking for a new credit card. We asked friends what their favorite cards were. Most had no idea what we were talking about (you can have a favorite credit card, right?).
But a couple of people raved about their cards: the reward points, the travel perks, the insurance, etc.
When we looked up the cards we balked. How could anyone pay what was, in our mind, astronomical annual fees on a credit card?
To be fair, we had more miles than we needed because Jordan was working all over the world and flying well over 100k miles per year. The other perks didn’t really tempt us. But as our travel situation has changed so has our thoughts on credit cards with annual fees.
Now when we ask ourselves, “Is it worth it to pay an annual credit card fee?” the answer is a resounding, “YES!…on the right credit card.”
Here’s everything you need to know about annual credit card fees to help you decide if it’s worth it.
What is an annual fee on a credit card?
An annual fee is a cost that you’ll have to pay every year to use your credit card. You’ll see this fee ranging from less than $100 to over $550. Generally, the higher the annual fee, the more rewards are available.
This fee is separate from any other type of fees you’ll see on the card, like interest or late fees. The annual fee is meant to cover the perks that you receive from using the card. These perks can include things like:
- Rewards: Some cards over cash back or mileage accrual each time you swipe the card to make a purchase.
- Travel perks: Rental car insurance, canceled trip insurance, lounge access, and membership fee reimbursement for Global Entry or TSA PreCheck are just some of the travel perks cards will offer.
- Sign up bonuses: Want to earn a lot of points quickly? You’ll get a head start with mile or point bonuses just from signing up for a credit card.
Cards without an annual fee may offer some of these rewards, but they’re usually at a lower rate than what cards with an annual fee offer.
When do you pay an annual fee on a credit card?
The annual fee on your card will usually be charged once per year. You’ll first be charged the fee when you open the card, unless you find a card that waives the fee in the first year. After that, the fee will usually be charged every 12 months after that — somewhere around the anniversary of opening the card.
Is it worth it to pay an annual credit card fee?
It depends – there’s no one right answer here. If you pick the right card and use it strategically, the value that you can get from the card perks can be a lot more than the actual fee on the card.
For example, I recently just used my United℠ Explorer Card to pay for my Global Entry membership. The card reimbursed me for the $100 membership fee, which more than made up for the $95 annual fee.
How can you decide if it’s worth it to pay an annual credit card fee? Let’s go through an example using the Chase® Sapphire Preferred Card and the Chase® Sapphire Reserve Card, two popular rewards cards on the market today.
Chase® Sapphire Preferred Card
The annual fee for the Chase® Sapphire Preferred Card is $95 and it comes with a slew of benefits. Here are some ways the benefits may make up for the cost of the annual fee:
- Sign up bonus worth up to $750: If you spend $4,000 on the card in the first three months, you could receive a signup bonus worth up to $750 in travel. If you hit that bonus — and use the travel credit — the annual fee has more than paid for itself that first year.
- 2x points on travel and dining: If you spend at least $4,750 each year on travel and eating out, you’ll receive enough points to cover the cost of the $95 annual fee.
- Primary rental car insurance: This is a perk that is good to have, but you hopefully won’t need to use. If you rent cars in the US often and want extra coverage, this card can act as your primary rental car insurance, which will save you a lot of cash compared to buying insurance through your rental car agency.
This is just a selection of benefits. The card also comes with trip protection, extended warranty and purchase protection, plus lost baggage reimbursement. For a lot of people who enjoy traveling, the card offers more benefits than the $95 in fees that it costs each year.
Chase® Sapphire Reserve Card
The annual fee for the Chase® Sapphire Reserve Card comes with a jaw-dropping $450 annual fee. But while a fee that big used to get a hard “no” from me, there are a number of situations where it will more than pay for itself:
- Sign up bonus worth up to $750: just like the Chase® Sapphire Preferred Card, this one comes with the same sign up bonus. By spending $4,000 in the first three months, the card can pay for itself that first year.
- 3x points on travel and dining plus a $300 travel credit annually: If you spend $5,000 per year on travel and dining, you’ll have $450 in combined points and travel credits, which covers the cost of the annual fee.
- Travel benefits: priority pass lounge benefits, primary rental car insurance, and application fee reimbursement for Global Entry or TSA Pre-check (up to a $95 value).
For the right traveler, this card offers benefits far above and beyond the $450 annual fee.
Should you pay the annual credit card fee? How to do your own calculation.
If you know what your spending habits are, it can be easy to do your own calculation, like the one above, to decide whether it makes sense for you to pay an annual credit card fee.
As you’re doing your own calculation, here are some things to consider:
- Most cards with an annual fee come with a big sign-up bonus. Can you meet that sign up bonus with your normal spending?
- Does the card offer reward points that will outweigh the price of the annual fee in future years?
- And does it come with additional benefits that you’re likely to use?
Should you cancel a card with an annual fee?
What if, when you do the calculation, your realize that paying an annual fee isn’t worth it for you? You might consider canceling it. But, just like with most things in life, there are pros and cons to closing a card.
Benefits of canceling a credit card
- You won’t pay the annual fee, saving you money each year
- Help prevent identity theft by not having unused card fall into the wrong hands
Drawbacks of canceling a credit card
- If it’s one of your oldest cards, you could lose some of the length of your credit history.
- Your credit score may take a small dip as the amount of credit available to you decreases.
How else can you avoid an annual fee on a credit card?
Many of the cards that have an annual fee offer to waive the fee in the first year. That makes it easy to rack up rewards for free. But what happens the next year when they want to charge you the annual fee? Is there any way to avoid it without closing the credit card?
There are a couple of options for you:
- Ask for the annual fee to be waived. To be totally honest, I’ve never had luck with this approach. But according to the Reddit, other people have so it’s worth a shot.
- Downgrade your card. We’ve used this approach. Jordan had the United mileage plus credit card and wasn’t getting enough value to justify the $95 annual fee so he called and downgraded to a card without an annual fee.
Is it worth it to pay an annual credit card fee?
If you get the right card and use it strategically, it can definitely be worth it to pay the annual fee, even on a number of different cards. But don’t waste your money paying for cards you don’t use.
Download our free travel guide below for more travel advice. We love to make our travel dollars stretch, get the guide to see how we do it.
Erica Gellerman is a CPA, MBA, personal finance writer, and founder of The Worth Project: personal finance and family travel. website. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, The Everymom, and Lifehacker. When she's not writing about personal finance you can find Erica exploring Europe from her temporary home base in London.
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