Overview
Annual fees are the bane of most points-and-miles users’ lives. Recent years have seen premium card fees soar, with the dreaded $ 1,000-a-year mark looming ever closer. If you’re new to the space, these often seem intimidating — and they are — but they can also help fund the impressive earnings and perks the cards offer.
Still, opening any card, fee or not, shouldn’t be an instinctive decision. Weighing where the card fits into your personal strategy and how much value it can offer is complex. It’s a different answer for different people at different times. Regardless, here are the big questions you should be asking yourself when deciding between a card with an annual fee and one without.
Can You Afford It?
The most straightforward question you need to ask is whether you can afford it up front. If a card has an annual fee of $495, and you’re unable to pay the fee off before you start getting charged interest, you either need to downsize or opt for a no-annual-fee product. If finances are that tight, you need to be analyzing the realities of your situation before anything else. Part of that is accepting that it might not be the best time for you to get truly invested in points and miles.
Can You Get Value From It?
This can be a complicated question. A no-annual-fee card is obviously the simpler option in this case. You start with a blank slate and, assuming you don’t plunge yourself into debt or spend more than you should, any earnings are free and clear value. On the other side of the equation, a card with a fee, whether it’s $95 or $895, forces you to start in the negative. It’s your job to work out if the things it offers can take you into a positive figure.
Look at:
The intro bonus
Can you hit the spending threshold safely?
What is the bonus worth?
Will it offer you any direct savings?
If you’re savvy with your points, a good intro bonus could cover an annual fee for years. This isn’t the best way to look at it, necessarily, but it highlights how much you can gain from the product. 100,000 points could grab you four or five flights or a huge business class redemption. This can comfortably cover the annual fee.
But remember, the intro bonus only happens once. The annual fee comes back every twelve months. With that in mind, you need to factor in…
The earning rates
Does it have strong bonus categories that complement your spending?
Do cheaper/free cards have similar spending categories?
Do you spend enough in those categories to balance out the fee?
The perks and benefits
Does it offer any high-end perks that you would traditionally pay for?
Does it offer other benefits that can save you money in a roundabout manner? For example, if a card offers lounge access, you might never pay for an airport lounge, but you spend $40 in airport restaurants every time you fly — lounge access saves that money.
Are there statement credits for things you use?
Are these credits for places you don’t use, but could be useful?
All of these can add value and help cancel out the annual fee. The most important thing is that you’re honest with yourself about the benefits. If you only fly twice a year, lounge access worth $500 annually isn’t worth $500 to you. It’s worth whatever you save at the airport in food and drink costs.
A no-annual-fee card is unlikely to have many (or any) of these benefits, as they’re typically funded by the fees. But if the benefits don’t line up in a value sense, the no-annual-fee card could be the better fit for you.
What Do You Already Have In Your Wallet?
“No card is an island”, they say…or something like that. Regardless, you can’t open a card without considering your broader strategy. Each card in your wallet should have a specific role, whether it’s solely for the intro bonus, maximizing your eating or travel habits, or gifting you lounge access. Opening a card with a sizeable annual fee that’s doubling up on a benefit could be hamstringing your efforts. The more fees you need to deal with, the better you need to be at maximizing your value.
Too many people open multiple premium cards, often leaving them with multiple versions of the same benefits and stepping on the toes of the other card’s earning rates. If the card you want to open is at risk of overcrowding your wallet, consider the low- or no-annual-fee option.
What’s Your Break-Even Point?
Once you’ve considered all of the above, you’ll have a better grasp of what you need from a card in your current situation. Calculate the break-even point for your car, and how easily you can achieve that. Then look at the best no-annual-fee alternative, and see where you end up.
For example, if a card costs $395 and $250 of its statement credits or perks are genuinely useful to you, you still need to justify the remaining $145.
Say the card earns 3x points per dollar on restaurants and that’s what you’d primarily be using it for. On its own, that sounds pretty good. But if a no-annual-fee alternative earns 2x points on the same spending, you’re really only gaining one extra point per dollar by paying the fee.
At a conservative one-cent-per-point valuation, you’d need to spend $14,500 a year on restaurants before that extra 1x earning makes up the remaining $145 annual fee.
That doesn’t necessarily make the fee card a bad choice. You might value your points more highly, or get additional value from other spending categories and benefits. But it shows why you need to compare cards against their closest alternatives rather than looking at their earning rates in isolation.
It sounds complicated, and it is a little, but the math is simple once you think about it logically.
The Point
There’s no definitive answer as to whether you need a no-annual-fee card or not. It varies drastically depending on your spending habits, current card selection, perk requirements, and financial stability. The most important thing is to consider each aspect of your situation and don’t assume that because one earning rate is higher that you’ll definitely come out the other end on top.
