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.
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.
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:
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.
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.
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.
The articles are written by personal finance enthusiasts (not certified professionals) based on their personal experience. What works for them may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
In accordance with FTC guidelines, we disclose that we have a financial relationship with companies mentioned in this website. This may include receiving access to free products and services for product and service reviews and giveaways.
Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.