Listen weekdays from 1-3pm ET
(No audio? Try our help)
Recent shows | More media

Listen Live: Mon-Fri 1-3pm ET

Posted: 6:00 a.m. Wednesday, April 16, 2014

Is Paying an Annual Fee on a Credit Card Really Worth It?

  • comment(6)



By Mike Jelinek, Contributor

ClarkHoward.com


You probably know that paying an annual fee for a credit card typically means you’ll get more benefits. Whether or not it’s truly worth it comes down to your purchasing decisions and spending habits.

In most cases, my research has shown that the annual fee is worth the extra rewards -- unless you simply don’t use your credit card that often. Also, keep in mind that just about every credit card with an annual fee will waive the fee for the first year.

There aren’t many cards that have a no fee version and an annual fee version, but some of the best credit cards do have this option. If you are considering the no fee version vs. the annual fee version of a card (or if you’re just trying to decide on paying an annual fee at all), this breakdown should help answer your questions.

To illustrate my point, I’m going to conduct a brief case study of two very popular cards by comparing the no fee version and the annual fee version. I’ll compare both versions of the best travel credit card as well as the top cash back credit cards from American Express.

Barclaycard Arrival™ World MasterCard®

The Barclaycard Arrival™ World MasterCard® offers two versions: Earn 1x or 2x on all purchases. As you guessed, the 1x version comes with no annual fee, while the 2x comes with an $89 annual fee that is waived for the first year.

Let’s start by taking a quick look at the rewards overview for each card.

Barclaycard Arrival™ World MasterCard® – Earn 2x on All Purchases

  • Earn 40,000 bonus miles when you spend $3,000 or more on purchases in the first 90 days from account opening (equals $400 off travel).
  • Earn 2X miles on all purchases
  • Get 10% miles back when you redeem for travel statement credits (i.e. redeem 25,000 miles for travel and get 2,500 miles back)

Barclaycard Arrival™ World MasterCard® – Earn 1x on All Purchases

  • Earn 20,000 bonus miles when you make $1,000 or more in purchases in the first 90 days from account opening (equals $200 off travel).
  • Earn 2X miles on travel and dining purchases
  • Earn 1X miles on all other purchases
  • Get 10% miles back when you redeem for travel (i.e. redeem 25,000 miles for travel and get 2,500 miles back)

Real Life Comparison

I’m going to use a model that assumes you spend $15,000 on your credit card each year. I’ll break that down into specific purchases in detail in order to get a more accurate representation.

In the first year, you spend $5,000 on travel and dining purchases (but let’s assume you spend $3,000 in the first 90 days). You also spend $10,000 in other miscellaneous (non-travel and dining) purchases for the remainder of the year.

In the next three years, you spend the same $5,000 on travel and dining, but let’s assume you earn more money and spend $15,000 on miscellaneous purchases per year.

Rewards Earnings After 1 Year

In the first year, you’ll accumulate the $400 bonus, plus an additional $300 in rewards and you’ll pay no annual fee. With these spending habits, you’ll earn $700 redeemable for travel with the 2x card.

The first year with the 1x card will get you a $200 bonus, plus $200 in rewards for a total of $400 redeemable for travel.

In the first year alone, you earn $300 more
with the 2x card vs. the 1x card using this model.

Cumulative Rewards Earnings After 4 Years

As you get into year two, there are three things that change. First, the annual fee kicks in for the 2x card. Second, there is no longer a sign up bonus to earn. Third, we are now assuming that you’ve upped your spending $5,000 on miscellaneous purchases.

With both cards, you’ll earn 2x on the $5,000 spent on dining and travel. On the next $15,000, you earn $300 on the 2x card and $150 on the 1x card. Once you subtract the $89 fee now in effect, you are left with an extra $61 for using the 2x card in the second year and every following year.

Mapping this out over three more years comes to an extra $183 for using the 2x card. Taking a four-year look, you simply add in the $300 more you earned with the 2x card vs. the 1x card.

After four years, you would earn $483 more by using the 2x on all purchases card.

When you should get the no annual fee card

The only case where you want to get the Barclaycard Arrival™ World MasterCard® - Earn 1x on All Purchases instead of the 2x card is if your spending will not compensate for the $89 fee long-term. Just remember that the $89 annual fee is essentially paid for over the first three years by the extra $200 you receive on the sign-up bonus for the 2x card. To make the annual fee worthwhile, you have to spend at least $4,500 on the 2x card per year.

 

Blue Cash from American Express

The Blue Cash cards from American Express are considered among the very best cash back credit cards on the market. There are also two versions available: The Blue Cash Preferred® Card from American Express with a $75 annual fee and Blue Cash Everyday® Card from American Express with no annual fee.

There are several differences in rewards between these two cards to take note of.

The Blue Cash Preferred® Card from American Express

  • Get 100 Reward Dollars, redeemable for a $100 statement credit, after you make $1,000 in purchases with your new card in the first three months.
  • 6% cash back at US supermarkets up to $6,000 per year in purchases
  • 3% cash back at US gas stations & select US department stores
  • 1% cash back on all other purchases

Blue Cash Everyday® Card from American Express

  • Get 50 Reward Dollars, redeemable for a $50 statement credit, after you make $1,000 in purchases with your new card in the first three months.
  • 3% cash back at US supermarkets, up to $6,000 per year in purchases
  • 2% cash back at US gas stations & select US department stores
  • 1% cash back on other purchases

Real Life Comparison

In order to get a solid comparison, I’m going to assume that anyone getting this card will be spending at least $6,000 per year on groceries to maximize the rewards. Let’s also assume that you spend $3,000 per year on gas and another $3,000 per year at department stores.

Just for this example, assume your spending is consistent every year. Let’s not count any other purchases at the standard 1% rate (the smart thing to do would be to use a card like the Barclaycard mentioned above to earn 2x on your standard purchases).

Rewards Earnings After 1 Year


The Blue Cash Preferred® Card from American Express has a $75 annual fee that kicks in right away in the first year. Based on the spending model above, you’ll earn the $100 sign-up bonus, $360 in rewards from grocery purchases, and an additional $180 from your gas and department store purchases. The total rewards earned for the first year stand at $565 with the Blue Cash Preferred® Card from American Express.

With the Blue Cash Everyday® Card from American Express you pay no annual fee. Using the same model, you’ll earn a $50 sign-up bonus, $180 in rewards from groceries, and $120 from gas and department store purchases. The rewards for year one would be $350 with the Blue Cash Everyday® Card from American Express, which is $215 less than the Blue Cash Preferred® Card from American Express.

Cumulative Rewards Earnings After 4 Years


As spending remains consistent each year, it’s easy to calculate how this projects out over four years. After four years with the Blue Cash Preferred® Card from American Express, you will accumulate $565 the first year, plus $1,395 over the next three years for a total of $1,950.

Making the exact same purchases, the Blue Cash Everyday® Card from American Express will earn you $350 in the first year and another $900 over the course of the next three years for a total of $1,250 in rewards.

In this case, the annual fee card earns you an additional $700 in rewards over four years.

When you should get the no annual fee card

The only reason you would get the Blue Cash Everyday® Card over the Blue Cash Preferred® Card is if your annual spending is very low. In that case, you may not want to get either card. I recommend going with the Blue Cash Preferred® Card from American Express or nothing at all if you’re trying to decide between the two.

Final Thoughts

This brief case study shows that paying an annual fee for a quality credit card should not be something you look to avoid. Study your previous monthly spending habits to calculate if it will be worth it for you ahead of time. Getting a credit card is an important decision because you’re more than likely stuck with it for a long time. You might as well get the most value out of it by maximizing your rewards earning potential on things you buy.

Mike Jelinek is a financial contributor for The Simple Dollar and head of content at Reviews.com. He writes about personal finance topics, like credit cards, and finds the truth about a variety of products and services across different industries.

For further reading:

 

 



  • comment(6)