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This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don't miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.
In a recent issue of Dollar Scholar, I learned that credit card companies have a whole bunch of different ways to make money off me. While most of that revenue comes from interest I pay when I revolve a balance and interchange fees that stores pay when I swipe, there are also a lot of cards out there that also boost their bottom line by charging annual fees.
On its face, it seems ridiculous that I would voluntarily pay hundreds of dollars just so I can spend my own money, but it's clear that plenty of people do just that: More than 1 in 4 credit cards issued by big banks have annual fees, according to the Consumer Financial Protection Bureau.
Do all those cardholders know something that I don't? I’m skeptical that the benefits of a credit card with an annual fee — especially if we're talking several hundred dollars — can actually be that great. I need to get some answers so I can mentally move on from my fixation.
How can I tell whether a credit card annual fee is worth it?
Dave Grossman, credit card expert and founder of Your Best Credit Cards, says high annual fees help cover the costs of the perks I get for being a customer. Depending on what those perks are, he says their value can vastly outweigh the fee.
“I pay thousands of dollars in annual fees every year, and I calculated that I come out ahead on every single one of them,” Grossman adds.
Even as credit card companies have hiked interest rates in recent years, many cards’ annual fees have remained around $95, he says, because $100 is a psychological barrier for consumers. Some of the most popular entry-level rewards credit cards, including the Chase Sapphire Preferred, Capital One Venture Rewards and American Express Blue Cash Preferred cards, all come with a $95 annual fee.
After that, the sky's the limit. Grossman says annual fees on luxury rewards cards range from $550 (Chase Sapphire Reserve) to $695 (American Express Platinum).
Those costs may sound hefty, but I can typically get my money back in three ways: issuer-funded benefits, network benefits and points programs, says Vrinda Gupta, CEO and co-founder of Sequin, a woman-focused debit card.
Issuer-funded benefits include things like Priority Pass membership, which gives me access to over 1,600 airport lounges with food, drinks, free WiFi and spa treatments. (To enroll in Priority Pass without a travel credit card costs $99 a year plus $35 every time I want to visit a lounge; with my Chase Sapphire Reserve, it’s free.) Another example is Uber Cash; American Express Platinum members get $15 a month, plus an extra $20 in December.
Sweetening the deal are statement credits. For instance, the Capital One Venture Rewards card gives customers a credit of up to $120 for Global Entry or TSA PreCheck.
Then there are network-funded benefits, which Gupta says are paid for by a credit card network like Visa or Mastercard. These often include rental car insurance or trip protection that can cover me if my flight is delayed or canceled or the airline loses my suitcase.
Finally, there are the points I earn when I use the card. Depending on the card, I can exchange those points for rewards like cash back, free flights, comped hotel stays or merchandise.
Credit card rewards are a big business. In total, Americans earned over $40 billion in credit card rewards in 2022, according to a report from the CFPB. There’s a whole subset of people who make a hobby out of maximizing, or "hacking," these credit card programs so they can travel the world for cheap.
But determining whether a fee is worth the perks and rewards isn't always a straightforward trade-off.
For one thing, I have to decide how much time and effort I want to devote to keeping track of everything — for instance, making sure I always book my travel on the card that gives me five travel points for every dollar I spend or staying on top of using my credits before they expire.
Grossman compares it to coupon-clipping, another activity that can save you money but requires you to invest your time: “You can get the value back, but you have to actually remember to do it and think about it,” he adds. “Some people make spreadsheets.”
If I don’t want to dive in that deep, he suggests I find a standard 2% cash back card and call it a day. But if I’m seriously weighing a high-annual-fee card, I should do some basic math to determine whether it's the right fit for my lifestyle.
For this, Grossman likes to use a worksheet where he writes out the benefits and monetary values of perks included with each card. At the end, he adds up everything in the value column and subtracts the annual fee.
If the remaining sum is negative, the card is a no-go. If it’s positive, that’s a solid signal that it’s a good option.
The other crucial piece of the equation is considering how much I value specific perks. In doing these calculations, it’s crucial to remember that some perks may hold more weight for me than others. Say I’m really into Disney: While the $49 Disney Premier Visa card might not look exciting to a non-Disney fan, getting special character meet and greets at the parks might be more valuable to me than a costlier perk provided by a different, more quote-unquote "exclusive" card.
“The higher-end cards come with more benefits, for sure, but what's interesting is that they’re not equally useful,” Grossman says.
The bottom line
To tell whether an annual fee is worth it, I have to holistically consider the value of the benefits of the card to me in particular.
“Do the math and make sure it works for you,” Gupta says. “It’s more of an art rather than a science, and there isn’t a one-size-fits-all.”
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