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When does it make sense to pay an annual fee?

I am a fan of credit cards with no annual fees. In many cases, you can earn rewards of 2% or more on every purchase, 3% on unlimited purchases in select categories, or 5% in rotating categories without paying an annual fee. You can also access valuable benefits like extended warranty protection, cell phone protection, and trip cancellation/interruption insurance without giving a single dollar to the credit card companies.

Yes, I still have several credit cards that I may an annual fee on. So, when would it ever make sense to pay an annual fee for a credit card?

What is worth paying for?

When you pay an annual fee for a credit card, you’re paying for a set of benefits and perks. Generally, this falls into three categories:

  • Rewards – Some cards offer more rewards than I could get on a card that does not charge an annual fee. I pay for my Blue Cash Preferred® Card from American Express because I get 6% back on up to $6,000 of groceries each calendar year.
  • Better redemption access – If I want to transfer my Chase Ultimate Rewards to an airline or hotel transfer partner, I will need to pay for a Chase card with an annual fee.
  • Card benefits – I don’t have elite status on American Airlines, but I do. My American Airlines credit card gives me free checked bags when I book my AA flights with the card. My World of Hyatt credit card gives me a free night each year. My Delta Platinum Amex credit cards give me a companion certificate and a boost toward my Delta status.

What is the alternative?

When you’re considering whether to pay an annual fee for additional rewards or benefits, it’s important to consider what alternatives are available.

Using my Blue Cash Preferred® Card from American Express provides a great example here. If I maximize the card’s 6% back on up to $6,000 of grocery store purchases, I earn $360 worth of cash back on this card. That’s more than the card’s $95 annual fee. But that doesn’t tell the whole story.

I could be getting 2% cash back on a card that earns 2% everywhere or 3% cash back on a no-annual-fee card with a grocery bonus category. With a 2% card, I’d earn $120 on that $6,000 of grocery store spending. With a 3% grocery store card, I’d earn $180. So the marginal amount of cash back I’d earn would only be $240 or $180, respectively. That’s still more than the $95 I’m paying for the annual fee card.

Always consider the marginal rewards you earn from a card, or the rewards you’d earn over and above the next-best alternative.

What would you pay in cash?

You should always be getting more value from the benefits of your credit card than you are paying in fees. And a good way to assess this is to list the benefits of each card in your wallet and ask yourself, “What would I be willing to pay, in cash, at the start of the year to get these benefits.” If the answer is greater than the card’s annual fee, that card is a keeper.

I reassess the value I get from every credit card that I pay an annual fee on every year using this same question. I recently asked that question about my Chase Sapphire Reserve card, and the answer ended up being, “no.”

How much you might be willing to pay for any given benefit is up to you. Maybe you travel frequently on a certain airline and would otherwise pay for checked bags. That benefit might be worth paying for. If you’re on team, “no checked bags” you’re probably not interested in paying for a benefit that would would not otherwise use.

Duplicate benefits don’t count

One important thing to mention is that benefits that you can’t use twice shouldn’t be counted twice in your value calculations. Many of my traveling friends carry several cards that offer Priority Pass airport lounge access. If I have two cards that get me into the same airport lounges, the value of that benefit on the second card is negligible. The same goes for perks like checked bags on airlines. If you already have checked bags through another credit card or airline status, getting your “first checked bag free” twice still means you’re only getting one bag.

Perks worth paying for

Here are the perks that I consider worthwhile to pay for.

Checked bags

A free checked bag is perhaps the biggest advantage of most airline credit cards that carry annual fees. If you regularly check bags and travel with some frequency, this benefit can easily displace cash you would otherwise spend. Most airlines offer a free checked bag on their co-branded credit cards that charge an annual fee.

The amount of money you save on checked bags by holding a credit card can really add up. Delta, for example, charges $30 for a checked bag on U.S. domestic flights. But if you travel round-trip, that’s $60. If you have a family of five and traveling twice a year, each with a checked bag, that comes to $600 in checked bag fees. Suddenly, spending $95 on a credit card sounds like a great deal.

Of course, if you’re on Team No Checked Bags, this benefit is unlikely to be valuable to you. And if you already get a free checked baggage allowance through your airline elite status, this benefit has no value because it duplicates something you’re already getting.

Hotel nights

If you travel frequently, you can get value from hotel credit cards that offer a free night every anniversary year. These free night benefits all come restrictions, usually limiting you to booking only a certain category of hotel or a hotel offering rooms for a maximum number of points per night. But without too much effort, most travelers can get plenty of value out of these perks.

As an example, the World of Hyatt Credit Card offers a free category 1-4 Hyatt hotel night each year for its $95 annual fee. Want to stay at the Thompson Washington D.C. during peak season? Your annual certificate will get you a one-night stay. If you paid for the same stay in cash, you’d pay $311/night.

Many high-annual-fee cards offer free nights, but here are a few low-annual fee cards that offer an annual free night:

  • IHG Rewards Premier Credit Card ($99 annual fee) – 40,000 point stay each anniversary year
  • IHG Rewards Premier Business Credit Card ($99 annual fee) – 40,000 point stay each anniversary year
  • Marriott Bonvoy Boundless Credit Card ($95 annual fee) – 35,000 point stay each anniversary year

Airport lounge access

Airport lounges can provide a quiet place to get some work done, free food, free drinks. Some airport lounges even provide a place to take a nap. This perk is valuable, but it also comes at a cost. Cards offering this perk often come with a correspondingly high annual fee, sometimes as much as $695.

Each premium credit card offering lounge access comes with a combination of one or more of the following programs:

Priority Pass – Priority Pass is a lounge access program that contracts with third-party lounges all over the world. The program has lounge locations in most global hub airport, plus many airports in the United States. Depending on the lounge access provided by your specific card, you might be granted only a certain number of visits or be able to bring an unlimited number of guests with you. Priority Pass lounge access is often a benefit of premium travel credit cards that charge a $395+ annual fee.

Airline Lounges – Most global airlines operate their own lounge locations. These locations, like Delta SkyClubs, United Clubs, and American Admirals Club, cater to frequent flyers of that particular airline. Often lounge access to these locations is a perk of that airline’s high-end premium credit card. Airline lounges typically (but not always) require you to be flying on a same day ticket on that airline or a partner airline as a condition of access.

Credit Card Lounges – The American Express Centurion Lounge is the original credit card airport lounge club and Amex currently operates more than 40 lounges in its network, These lounges are accessible by American Express Platinum cardmembers and holders of some other high-tier premium American Express Cards. Recently, other banks have gotten into the lounge game. Capital One has its flagship lounge in Dallas, and is soon opening one in Denver and Washington-Dulles.And Chase has partnered with The Club to launch its own locations.

Redemption options

Within the Ultimate Rewards and Citi ThankYou Points rewards programs, you cannot transfer points to most travel transfer partners unless you hold a card that charges an annual fee.

If I redeem 50,000 Ultimate Rewards points each year for a penny each, I get $500 of value out of my points. If I hold a Chase Sapphire Preferred card, I can redeem points for travel through Chase Ultimate Rewards at 1.25 cents each, getting $625 of value out of those points. If I transfer those points to World of Hyatt, I can get even more value from them. The additional value I get from my point redemptions alone makes paying the Sapphire Preferred’s annual fee worth it.

Additional rewards

Blue Cash Preferred® Card from American Express card art
Blue Cash Preferred® Card from American Express

Sometimes it can be worthwhile to pay an annual fee to earn additional rewards, but it’s important to compare the rewards you’re getting against what you could get from a no-annual-fee card.

Let’s look at the Blue Cash Preferred® Card from American Express as an example. This card’s annual fee is $95, but it give you 6% cash back on up to $6,000/year of U.S. grocery store purchases. If you maximize the 6% rewards, you’ll earn $360 in cash back rewards. Subtract the card’s annual fee ($95) and the 3% you could earn from a no-annual-fee card, ($180) and you’re up only $85/year.

Before paying an annual fee to earn a higher rate of rewards. Many popular categories offers. Before paying a $550 annual fee for a Chase Sapphire Reserve card to earn 3x points on dining and travel, remember that you can earn 3% cash back in these categories on cards with no annual fee.