The Frugal Creditnista

Annual Fee Rewards Cards: Are They Worth It?

If you have decent credit, your mailbox probably sees a steady flow of offers from credit card providers, with each one promising something or other. Indeed, there are countless credit card options out there, so if you’re looking to expand your credit portfolio with a new card, it’s not easy to choose the best one for your finances.

With all those options, many credit card users don’t even consider annual fee cards. After all, why pay for a card when you can get other cards for free? Actually, it’s not that simple. Annual fee cards typically come with valuable benefits that free credit cards don’t offer. So are they worth it? Let’s look at the potential advantages of annual fee rewards cards and how you can decide if a particular card is worth the fee.

Potential Benefits of Annual Fee Rewards Cards

reward cards

In comparing the pros and cons of an annual fee rewards card, the “con” is obvious: the yearly fee. For many such cards, the annual fee will cost you a few hundred dollars or more.

But with that annual fee, there are usually several appealing benefits. These vary from one card to the next, of course, but the most common perks you’ll see include:

  • Cashback on purchases, sometimes with higher cashback percentages on select types of purchases
  • Airline rewards miles or frequent flyer miles for a specific airline’s reward program, or in some cases, rewards miles that can be transferred to the airline of your choice
  • Free or discounted hotel stays
  • Discounts or freebies for airline extras like checked baggage fees
  • Free insurance for rental cars

There’s no “standard” rewards package for an annual fee credit card, so don’t make any assumptions about the perks above or any others you might expect.

How to Know If an Annual Fee Rewards Card is Worth the Cost

reward cards

If there’s an annual fee rewards card you’re considering, how do you know if it’s worth the cost? It depends on your circumstances and how you plan to use the card. For example, if you’re a frequent traveler, you’re likely to get your money’s worth from most annual fee cards because travel-related rewards are particularly common.

Regardless, follow these simple steps to find out if a card you’re considering is worth the annual fee.

Research the Perks

Take a look at the literature for the card you’re considering, whether it’s the credit card provider’s site or the packet you received in the mail. You should be able to find a list of the perks and rewards you would get with that card. It could be certain cashback percentages, frequent flyer miles, and so on.

Look at Your Recent and Expected Purchase History

This is the part that too many people miss – determining what value the card’s perks have to you. They may say you can earn up to $1,000 cashback or up to 100,000 bonus miles, but if you don’t spend anywhere near enough to get that $1,000 in cashback bonuses or if you rarely or never fly (or if you don’t fly with the airline that has these cashback bonuses), you won’t be able to take full advantage of those perks.

Take a look at your credit card activity from the past year. Look at how much you would have earned in cashback bonuses if you had used this card you’re considering, based on the categories that carry cashback bonuses. Look at how often you traveled and what airline you typically used.

Do the Math

This is the time-consuming part but the most valuable part as well: do the math. Add up how much money you would have earned or saved last year if you had used the annual fee card you’re considering. How does that dollar amount compare to the annual fee? Would you have made back the cost of the fee?

Make sure you take exceptions into account in this process. Maybe you traveled a lot last year, but it was only because you got married and were traveling for parties, honeymoons, and so on, so you don’t anticipate much travel this year.

Weighing an Annual Fee Rewards Card

reward cards

If you’re considering an annual fee rewards card, the decision ultimately comes down to dollars and cents. Don’t blind yourself to the financial pros and cons by looking at the pride of having a certain card that has a prestigious image. Be realistic about not how much the rewards could be worth but how much they’re worth to you based on your credit card activity. If the numbers work out in your favor, an annual fee rewards card could be the perfect way to make your money go further.

Your credit cards are merely one component of your financial health. For more tips on managing your finances, check out more of our personal finance blogs.

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