It used to be a cardinal rule of credit cards that you should avoid annual fees like the plague. I’ve never been very good at following rules and this is no exception. These days, what really matters is whether or not you’ll benefit from the card. Here are two scenarios where taking on an annual fee makes darn good sense.
#1: The rewards exceed the cost (by a whole bunch)
Whether we’re talking about a $39 or a $450 annual fee, this is the bottom line. You want to look at the sign-up bonus, the rewards program and the APR and other fees. If you can’t make a profit from your credit card, then find another card. There has to be synergy between your lifestyle and the rewards. Otherwise, the annual fee isn’t worth it.
The Chase Sapphire Preferred Credit Card has an annual fee of $95, but it’s waived for the first year. Let’s look under the hood and see what you get for your $95. You get 50,000 bonus points if you spend $3,000 in the first three months. That’s worth $625 toward airfare or hotel expenses. So far so good, right?
The question is: Are you going to spend $3,000 anyway? If you travel frequently, you’ll rack up that total in a hurry. You get two points per $1 spent on airfare and hotel accommodations when you book through Ultimate Rewards. Then you get 1 point on all other purchases. This card also doesn’t charge foreign transaction fees, which is another big savings if you travel overseas.
Okay, enough. They had me at 50,000 bonus points. See how easy this is? This card is worth the $95 annual fee if your lifestyle includes a lot of travel. Now, I’m assuming that you’re not going to carry a balance. Rewards cards have higher APRs so if you need to revolve a balance, find a low interest card.
Next, let’s look at a card that has truly extraordinary benefits and an annual fee that reflects that. The Platinum Card from American Express has a $450 annual fee. This is a charge card, not a credit card, so carrying a balance isn’t even an issue.
You get 25,000 in Membership Rewards bonus points after you spend $1,000 in your first three months, which is redeemable for a domestic round-trip coach ticket. So we can say the average value of the bonus points is around $250.
You get $200 in Airline Fee Credits each year to cover your martinis, baggage fees and more. At this point, the annual fee has paid for itself. If you travel a lot, there’s more to love. You get Priority Pass Select access to airport lounges. This benefit alone is worth hundreds. If that’s a benefit you value, this card is worth it at this point. You also get a complimentary companion ticket when you purchase a first- or business-class ticket, 24/7 concierge service and Global Entry, which is an expedited U.S. immigration pass. Oh, and no foreign transaction fees.
I’m not a world traveler (although I’d like to be) so paying an annual fee of $450 makes no sense for me. But for the consumer who travels for a living and spends a lot of time in airports, this card is likely worth the fee.
#2: You’re rebuilding your credit
When you’re rebuilding credit, you often have to pay more to get a credit card. This might mean a higher APR and an annual fee. But that doesn’t mean you have to accept outrageous terms just to get a card.
For those looking to rebuild or establish credit, I like the Orchard Bank Classic MasterCard. This card targets consumers who have a credit score of 649 or less. There’s an unsecured version, but if you don’t qualify for that card, you might be offered a secured credit card. This issuer reports to the three major credit reporting bureaus so you have an opportunity to improve your credit history.
The unsecured version has an annual fee that ranges from $19 to $59 the first year, and $59 each year after that. The secured version waives the annual fee for the first year, and then it’s $35 per year. If you have a low credit score, this card offers you a chance to rebuild credit while getting a variable APR of 14.90 or 19.90 percent for an unsecured card and 7.90 percent for a secured card.
No, you don’t get a big sign-up bonus to offset the fee, but really, that doesn’t matter right now. Your goal is to get a card and use it responsibly. Over time, you’ll develop a rosier credit history and have access to cards that either don’t have an annual fee or have enough benefits to make the fee worth it.
At publishing time, Chase Sapphire Preferred Credit Card, The Platinum Card from American Express and Orchard Bank Classic MasterCard are offered on Credit.com product pages and Credit.com may be compensated if our users apply for and ultimately sign up for the card. However, this relationship does not result in any preferential editorial treatment.
Disclaimer: This content is not provided or commissioned by American Express. Opinions expressed here are author’s alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.
Image: Images of Money, via Flickr.com