When an Annual Fee Credit Card Makes Sense

The standard advice when it comes to getting a credit card is that you should avoid annual fees as much as possible. Usually, there are similar credit cards offered by the same providers, but without the fee. When you have limited cash flow, using a low fee credit card is the logical choice, because there are many credit cards that offer great service without costing you anything.

However, as with all rules, there are exceptions. When you get a low fee or no fee credit card, you are likely paying for it in different ways. For example, the fee could be lower because the rate points are paid out is less than other credit cards. You should be aware of this so you can better make decisions. 

There are three situations regarding credit card fees where it may make sense to pay an annual fee, and we are going to discuss them below. 

Earning a Margin on Your Investment

With all of the reasons outlined below, it is necessary to remember that breaking even isn’t enough to justify the fee. If you think of your investment of $120 (a common Visa® annual fee or MasterCard® annual fee amount), the desired return on this should be at least 20%. 

The goal of any spending is to turn it into more money. If you are just breaking even, then you are actually losing when you factor in the fact that money now is worth more than the same amount of money later. Additionally, you want to factor in the small amount of risk you are taking and get compensated for it. So essentially, if you are paying a $120 annual fee, you should look to receive a minimum of $150 back.

The Points Make Sense

As briefly discussed above, the rate at which you earn points may change depending on the fee you are paying. So it is very possible that it is a better deal for you to get a card that has a higher annual fee but also pays out more points.

It is up to you to do the math based on your projected spending in order to figure out what amount of points you are reasonably going to earn during the year. Compare this to your annual fee, and then remember that you want to be earning a decent margin on your investment. 

Sometimes, during a credit card promotion, the sign-up bonus covers most of the annual fee, and sometimes it’s a combination of the earnings rate and the sign-up bonus that get you there. Assuming you are in the earnings bracket required by the credit card, you will probably have no problem hitting the correct spending rate. 

As an added bonus, you should look out for cards that offer the bonus again upon renewal at the end of the year. This will mean less work for you while continuing your high returns.

You’re a Big Perk User

Another situation that would justify paying the annual fee is if you use the perks enough that you are getting more than the annual fee in benefits. For example, this would mean you take the cost of lounge access, multiply it by the number of times you think you will use it next year, and then subtract it from the annual fee. 

If you’re flying a lot, then this could cancel out the whole fee, but you will likely combine it with the points to calculate your “return” on this credit card. 

You Need the Services Anyways

The final case occurs when you know you would need the extra services that come with the credit card regardless of whether they come with the card or not. Usually, this means something like the travel insurance, which most prudent citizens make sure to have when they go on vacation.

In this case, you can subtract the value of the services from the annual fee, and that is what you are truly paying for the use of the credit card. Chances are that the points you earn will cover the remaining expense, making this a win for your bank account. 

Renewing Your Card

The final case where you may be more comfortable getting a card with an annual fee is if you have had the card for the last year, paid no fee on it, but are now facing a fee upon renewal. In this case, if you found that a mix of all the different benefits seemed worthwhile, and you don’t want to go through the trouble of cancelling the card and finding a new one, then you can just keep the card and pay the annual fee. 

This is the lazy option, but it is a viable one if you think your time and comfort are so important that you are willing to shell out the money. My only advice here would be to look for other offerings by the same financial institution that might now come at a discount because you have already paid the annual fee.

So, What’s the Answer? 

In the end, it will all depend on your personal financial situation. Do you have the cash available to pay the fee right now? Are you likely going to sustain the spending rate that will get you a good return on your investment? Do the benefits of the card help you enough to justify the cost? All these questions and more will be necessary to answer in order to figure out if the annual fee makes sense for you or not. Sometimes, it might even make sense to wait for better credit card offers.

As a final point, it is possible that when you view many of the best annual fee credit cards from an investing perspective, there may be several that make sense. Obviously, act within your means, but it could make sense to get several credit cards with annual fees if they all earn you a material positive gain.