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The annual fee: It might not be the most controversial subject you can think of, but you're sure to start a spirited debate when you ask credit card users about whether it's ever worthwhile to pay a fee just to use a card.

Some people refuse to pay any annual fee whatsoever on principal. Others do the math and swear that the rewards and benefits offered by their pricey premium cards easily justify the annual fee. Who is right?

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Is the Annual Fee Worth It on a Credit Card?

I've been studying and writing about credit cards since 2008, and I currently hold 17 active accounts, split roughly evenly between those with and without an annual fee. Allow me to settle this question once and for all.

There's no denying that many credit cards have annual fees that can be well worth paying. But whether the fee is worth it or not totally depends on your circumstances and spending habits.

When you can receive additional rewards and benefits (beyond those offered by a no annual fee card) with value that exceeds the cost of the annual fee, then you're be better off paying the annual fee. That's not to say that everyone should have a credit card with an annual fee, however. Let's look at one simple example to demonstrate when a card's annual fee is (and isn't) worth it.

American Express Blue Cash: Annual Fee or No Annual Fee?

American Express offers two versions of its Blue Cash credit card. The Blue Cash Everyday® Card from American Express card has no annual fee and offers 3% cash back at U.S. supermarkets (on up to $6,000 per year, then 1%), 2% cash back at U.S. gas stations and at select U.S. department stores, and 1% cash back on all other eligible purchases. See Rates & Fees. Terms apply*

The other version, the Blue Cash Preferred® Card from American Express, has a $95 annual fee (waived the first year), but offers much higher rates of cash back. It gives 6% cash back at U.S. supermarkets (also on up to $6,000 per year, then 1%), 6% cash back on select U.S. streaming subscriptions (including Netflix, Disney+, and Apple Music), 3% back on transit purchases and U.S. gas stations, and 1% elsewhere. See Rates & Fees. Terms apply*

If you were to use the no-fee Blue Cash Everyday and spend $300 a month at U.S. supermarkets, you'd earn $108 of cash back each year with it. But you'd earn $216 in cash back if you were making the same grocery purchases with the Blue Cash Preferred card instead.

By choosing the Blue Cash Preferred you'd still come out $13 ahead on groceries alone, once you factor in the card's $95 annual fee. This is before you consider the 3% cash back offer at U.S. gas stations and on transit purchases, compared to 2% for the Blue Cash Everyday. You also earn additional cash back with the Blue Cash Preferred card's offer of 6% cash back on select streaming subscriptions, versus just 1% with the Blue Cash Everyday.

So in this case, anyone spending $300 a month or more on groceries is leaving money on the table by not going for the Blue Cash Preferred and paying the $95 annual fee.

Can a $550 Annual Fee Be Worth It?

I've had the Chase Sapphire Reserve since it was introduced four years ago. Until recently, it had a $450 annual fee, but that has been raised to $550 this year. Yet I have no intention of cancelling it. That's because I earn 3x points on all travel and dining, and those points are worth a minimum of 1.5 cents each toward rewards.

Yet it also offers me a $300 annual travel credit, which, in 2020 you can also use for gas or grocery purchases. Other benefits include a $100 credit towards Global Entry or TSA PreCheck and access to the Priority Pass Select Airport Lounges. It's even offering $120 in DoorDash credits ($60 in 2020 and another $60 in 2021). Every year, I add up the value that I receive from these benefits, and I have little trouble justifying paying the annual fee.

When Card Cards With No Annual Fee Are Best

Bear in mind that most cards that charge an annual fee are rewards credit cards, and they aren't right for everyone. Those who tend to carry a balance should focus on paying off their debt and use a card with the lowest possible interest rate. Since reward credit cards have higher interest rates than similar cards that don't offer rewards, a rewards card (with or without a fee) will be poor choice when you have to pay interest.

People with modest spending habits will often be better off using a card without an annual fee too. For example, if you only spend $150 a month at grocery stores, then you might not receive enough additional cash back to justify paying $95 a year for the Blue Cash Preferred instead of using the no-fee Blue Cash Everyday card.

Finally, there's always been room in my wallet for great cards that just happen not to have an annual fee. Currently, this include both the Chase Freedom Unlimited and the The Blue Business® Plus Credit Card from American Express.

Bottom Line: Should You Pay an Annual Fee?

The debate of annual fee vs. no-fee credit cards can get contentious, but different people can have different and equally valid arguments on opposing sides of the issue. Once you understand that when and how it can make sense to pay an annual fee to enjoy certain rewards and benefits, it will be easier to find the best credit card for your needs.

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