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 discovered the myriad ways in which credit card companies generate revenue from customers like me. The bulk of their income is derived from the interest payments I make when carrying a balance and from interchange fees incurred by retailers whenever I swipe my card. However, many credit cards also significantly contribute to their profits through annual fees charged to cardholders. This practice raises questions about the value of these fees versus the benefits provided.
At first glance, it seems outrageous that I would willingly pay hundreds of dollars annually just to access my own funds. Yet, it’s evident that many individuals do exactly that: According to the Consumer Financial Protection Bureau, over 25% of credit cards issued by major banks carry annual fees. This statistic prompts me to wonder if cardholders are privy to benefits that I am unaware of. I remain skeptical about the actual value derived from credit cards with high annual fees, especially when those fees reach several hundred dollars. I need to explore this further to alleviate my concerns.
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Evaluating the Worth of Credit Card Annual Fees: Key Considerations
According to Dave Grossman, a recognized credit card expert and founder of Your Best Credit Cards, hefty annual fees are often justified by the array of perks available to cardholders. These perks can vary significantly, and their value may, in fact, far exceed the fee itself, depending on the cardholder’s spending habits and lifestyle. Grossman shares that he pays thousands in annual fees each year but consistently finds that the benefits he reaps outweigh the costs.
Despite recent increases in interest rates by credit card companies, many cards maintain an annual fee around $95, which Grossman attributes to psychological barriers for consumers. Popular entry-level rewards cards, such as the Chase Sapphire Preferred, Capital One Venture Rewards, and American Express Blue Cash Preferred, typically come with this $95 fee. However, for those seeking luxury rewards, annual fees can soar to impressive heights, ranging from $550 for the Chase Sapphire Reserve to $695 for the American Express Platinum.
While these fees may seem substantial, Grossman explains that many cardholders can recover their costs in three primary ways: issuer-funded benefits, network benefits, and rewards points programs. Vrinda Gupta, CEO and co-founder of Sequin, a debit card aimed at women, elaborates on how these benefits can offset the annual fees, making them worthwhile for frequent travelers.
For instance, issuer-funded benefits may include services like Priority Pass membership, which grants access to over 1,600 airport lounges offering amenities such as complimentary food, beverages, free Wi-Fi, and spa treatments. Without a travel credit card, obtaining Priority Pass costs $99 annually, plus $35 for each lounge visit. Conversely, with the Chase Sapphire Reserve, this benefit is complimentary. Additionally, many credit cards offer statement credits, such as the Capital One Venture Rewards card, which provides customers with a credit of up to $120 for Global Entry or TSA PreCheck, further enhancing the value proposition.
Network-funded benefits are another valuable aspect, often provided by major credit card networks like Visa or Mastercard. These benefits can encompass essential protections such as rental car insurance and trip protection, which can be especially beneficial in instances of flight delays, cancellations, or lost luggage while traveling.
Moreover, the points earned through card usage can be redeemed for various rewards, including cash back, free airline tickets, complimentary hotel stays, or even merchandise. The lucrative nature of credit card rewards is underscored by the fact that Americans collectively earned over $40 billion in rewards in 2022, as reported by the CFPB. Many individuals have turned credit card rewards into a hobby, skillfully maximizing these programs to travel affordably around the globe.
Despite this lucrative landscape, determining whether an annual fee is justified based on the perks and rewards can often be complex. It requires a careful balancing act of weighing benefits against the costs.
One of the primary considerations is the amount of time and effort I am willing to invest in managing my credit card usage effectively. For example, I need to remember to always book travel using the card that grants the highest rewards, or keep track of using credits before they expire. Grossman likens this process to coupon clipping, which can save money but demands diligence: “You can get the value back, but you have to actually remember to do it and think about it,” he notes. “Some people even create spreadsheets to manage this.”
If I’m not prepared to dedicate that level of involvement, Grossman suggests opting for a straightforward 2% cash back card instead. However, if I am contemplating a high-annual-fee card, conducting a simple cost-benefit analysis is essential to determine if it aligns with my financial goals and lifestyle choices.
To facilitate this assessment, Grossman utilizes a worksheet to outline the benefits and their monetary values associated with each card. By calculating the total value of these perks and deducting the annual fee, I can gain insight into whether the card is worth pursuing. If the final figure is negative, it’s best to avoid that particular card. Conversely, a positive outcome indicates a potentially advantageous option.
Another critical aspect of this evaluation is acknowledging the significance I place on certain perks. During this calculation, it’s vital to recognize that specific benefits may hold different values for me compared to others. For instance, if I have a passion for Disney, the $49 Disney Premier Visa card may be more appealing due to exclusive perks like character meet-and-greets than a more expensive card with less personally relevant benefits.
“Higher-end cards certainly offer more benefits,” Grossman emphasizes, “but what’s intriguing is that these benefits are not uniformly valuable to everyone.”
Assessing the Value of Annual Fees: Making Informed Decisions
To determine if an annual fee is justified, I must take a comprehensive approach and evaluate the specific value of the card’s benefits tailored to my individual needs.
“Perform the calculations and ensure it aligns with your financial situation,” Gupta advises. “Ultimately, it’s more of an art than a science, and there’s no universal solution that fits all.”
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