Are Reward Credit Cards with an Annual Fee Worth It?

When used responsibly, a credit card can be a great tool. The right rewards program can provide you with free stuff, discounted travel and even cash back. When you use a good rewards program, you end up able to maximize your money. For the savvy credit card user (who pays off the balance each month), all the free stuff is a no-brainer.

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What is less clear, however, is whether or not a rewards credit card with an annual fee is worth it. After all, why should you pay to use a credit card when there are plenty of free options available? Depending on your habits, though, a credit card with an annual fee just might be worth it.

3 Factors to Consider

What are the Perks?

Most free rewards credit cards are pretty basic. You earn between 1% and 3% cash back. If you’re lucky, you might earn 5% cash back on certain spending categories. Or, you earn one point for each dollar you spend, with occasional promotions that allow you to earn more. Most of these cards come with standard perks:

  • rental car insurance,
  • fraud liability protection,
  • 24-customer service,
  • extended warranty on purchases, and
  • a few other items.

Rewards credit cards that charge fees, however, might come with more perks. You might get access to a concierge service, or to trip cancellation insurance. Additionally, many rewards cards that come with fees also allow you to earn points faster. You might get extra points on travel, or you might get 3% to 5% cash back on all your purchases. If you can earn more rewards, and get more perks that you are likely to use, paying an annual fee might be worth it.

Do You Use the Rewards Enough to Offset the Fee?

Of course, in order to make a credit card with an annual fee worth the cost, it’s important that you use the rewards regularly. Assess how often you will use the card, and whether the rewards program works for you. If you travel a great deal, a rewards card with a $90 fee might be worth it. If there are extra rewards for travel, and plenty of travel perks and insurance, you can enjoy peace of mind — while earning free travel — with a high-end card. If you are able to redeem rewards for two free airline tickets each year, the $90 fee is worth it. Especially if you are unable to earn the same rewards with a card that doesn’t have an annual fee.

Whether it’s cash back or travel rewards, the program needs to be compatible with your lifestyle. Look at whether or not you will use the rewards, as well as whether it will be possible for you to quickly earn rewards that are valuable enough to cover the cost of the fee. It might actually make sense for you to pay the annual fee if the rewards program is truly superior to what you can get with a fee-free credit card.

Earning More Rewards

Supercharge your ability to make sure the card pays for itself by planning your spending in a way that allows you to boost your ability to earn rewards. Create a budget that helps you live within your means. You don’t want to spend more than you normally would. Use your credit card to cover as many expenses as possible. Buy groceries, gas, and pay bills with the credit card. Make sure you stick to your budget, though.

Once you get the statement, you can use the money that’s been sitting in your bank account and earning interest all month to pay off the balance. That way, you will build up the rewards points or cash back without paying interest. Once you start paying interest, any benefit you get from the rewards program is likely to be nullified.

If you have a plan, and if you really will use the rewards, it might be worth it to get a credit card that charges an annual fee.

Do you have a credit card with an annual fee? What made you decide to use it?

Photo from Wikimedia Commons.

About the Author

By , on May 20, 2013
Miranda
Miranda is a freelance writer and professional blogger, specializing in financial topics. She has written for a number of financial web sites, and her work has been linked to by many publications, online and off. Miranda's blog is Planting Money Seeds.

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{6 Comments}

  1. Mary Slagel says:

    This is very informative. I feel like a moron admitting this but I’ve never actually thought this out. When I turned 18, my father told me to open a credit card so I could start establishing credit. With very little credit, I was unable to apply for several credit cards but I eventually found one that offered extra rewards for a store I constantly shop at, but it came with an annual fee. At that time, with very little credit, it was hard to find one with out the annual fee and the rewards were good enough I didn’t mind.

  2. Alex says:

    I upgraded mine right before my wedding to take advantage of the higher reward rates on our temporary spending increases. Now I just need to recheck my math and downgrade them if it’s no longer worth it!

  3. Like every other personal finance question, the answer is “it depends.” I have seen a lot of rewards cards which completely justify the annual fee while other cards aren’t worth the fee. It’s important to fully understand how you’re rewarded and what you can redeem the points for.

  4. We don’t for that very reason. It doesn’t seem smart when you can definitely find plenty with decent programs without a annual fee.

  5. krantcents says:

    I have 2 cards with annual fees and they are worth it. One is a airline card and the other is a hotel card. I use the airline card to travel overseas first or business class using the miles. I just recently got the hotel card, but I intend on using it for travel too.

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