Should You Get a Credit Card with an Annual Fee?

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This article is part of the multi-part MTH (“Make Travel Happen”) series designed to provide beginners with all the information needed to reach their travel goals. 

It feels like many if not most people that I know are adverse to getting a credit card with an annual fee. In their eyes, they don’t see a reason to have to pay to use a credit card when there are plenty of no-annual fee credit card options out there. However, the truth is that most worthwhile travel rewards credit cards do have annual fees and if you want to take advantage of some of the best benefits then you should consider applying for credit cards with annual fees. Here are some things you should know about credit cards and annual fees.

First, some basics about annual fees. 

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Not all credit card fees are created equal

There are basically three types of fees you’ll run into.

Annual fees waived the first year

A lot of the best travel cards waive their annual fee the first year. The annual fees that get waived are usually not greater than $200 — it’s really rare for a $300 plus annual fee to be waived. Finding a card with a waived fee is not hard and it gives you the ability to make the most of your points for free during the first 12 months of being a cardmember and then decide that card’s fate after a year. 

Standard annual fees 

Standard annual fees for a quality travel card typically range from $75 to $100, although they can be both higher and lower. The vast majority of my credit cards have annual fees at about $95. Nowadays, it feels less common to see a travel card without a first year waived annual fee. However, if you come across one, always be sure to check if that card is ever offered with the annual fee waived the first year. Many times a better sign-up bonus may be attached to a card but without the annual fee waived the first year.   

Benefit-based cards with $300+ annual fees

Credit cards the offer benefits, such as lounge access, typically have very high annual fees of $350 or more. Read my article on applying for these cards with high annual fees here to learn more about whether it might be worth it for you to apply. 

Ways to get around the annual fees

For many cards there are different ways to get around the annual fees.

Retention offers 

When you’ve had your card for several months or after 12 months when your annual fee comes due, you can often try to get a “retention offer” which is an incentive the credit card companies offer to keep you on board. Many times they may offer to waive the annual fee or grant you the points equivalent of the annual fee. Other times, they might give you an offer that requires you to spend a certain amount to receive the bonus.

There’s a good chance that your spending habits will come into play when being considered for retention offers. If you’ve put most of your spend on one card you might have a better chance at getting one of the better retention offers for that card.  However, at least on a couple of occasions, I’ve received retention offers on cards with little to no activity, so sometimes it’s virtually automatic you just have to request it.

Product changes or downgrades 

Product changes and downgrades are my favorite methods for getting around annual fees, but there are some things you should know.

  • Many credit card companies will require you to have a card for a minimum amount of time before you’re able to downgrade or product change your card, typically 12 months.
  • Always inquire about no annual fee versions of your card because many no annual fee versions of cards are not advertised to the public.
  • Sometimes the reps on the phone may not provide you with options to downgrade to certain cards even though you should be eligible to. This is why it’s important to do sufficient research and know your options for downgrading. 
  • You’ll often lose some key benefits to your card when you change it to a no annual fee version but you’ll still be able to benefit since you’re allowing your average age of accounts to age by keeping the card.

Canceling your card

I try to avoid cancelling cards at all costs.

If I’m considering giving up a card, I first try the retention offer route and/or the product change route before I ever try to cancel so I can age my account history as long as possible. (One exception to this would be if you have to cancel your card in order to churn the card and sign up for it and receive the bonus.)

Sometimes you might just need to cancel the card for whatever reason and it’s not the end of the world. Yes, that means your average age of accounts wont be able to age longer but that’s okay if it just happens here and there. 

To minimize the impact on your credit score from cancelling remember to shift credit out from the card you’re planning to cancel so that there’s no major drop in your utilization. If your utilization stays at around zero, then you don’t have anything to worry about. 

Should you pay the annual fee?

So now to the main point of the article: should you pay an annual fee for a credit card? There are two major reasons why you would pay for an annual fee for a credit card: necessity and sufficient return of value.

Necessity

For some rewards programs you will have to hold a card with an annual fee in order to transfer points to travel partners. In such cases, it makes it much easier to narrow down the card(s) you need to pay an annual fee for. 

For example, in order to transfer points to Chase Ultimate Rewards travel partners you’ll need to have the Chase Sapphire Preferred or the Ink Plus. Likewise, in order to transfer points to a Citi Thankyou partner you’ll need to have either the Citi Prestige or the Citi Premier. (With Amex, you can actually get away with a no annual fee card and still transfer Membership Rewards if you go with a card like the Amex EveryDay.)

Some of these cards like the Sapphire Preferred can usually be downgraded to avoid the annual fee after you’ve transferred your points. However, when you upgrade the card back to the premium edition, you’ll usually be subjected to the annual fee the next billing statement. 

Return of value 

Paying an annual fee is a bit like investing a small amount of money that allows you to reap benefits much more valuable than what you originally invested. In the case of credit cards, it usually means “investing” around $95 to reap a few hundred bucks of value each year (although your earnings can be much more substantial as seen below).

There are multiple ways to get value out of a credit card.

The sign up bonus

The sign up bonus is obviously the most valuable part of most credit card offers. Typically, you don’t factor in the sign-up bonus value in the longterm, so I’m not going to factor that in here. 

Earnings from spend

When it comes to keeping rewards credit cards for the long-term, this is usually the key factor to consider. It’s pretty simple, if you’re earning more value in points than you pay for the annual fee you’re coming out on top.

For example, let’s say you’ve got the Sapphire Preferred and you’re going to pay $95 a year for it. That means you’ll need to earn 9,500 Ultimate Rewards to offset the cost of your annual fee and any earnings above that are pure profit. So if you spent $9,500 on your Sapphire Preferred, you’d be guaranteed to at least offset the annual fee. 

In reality, the deal for many travelers is much sweeter. For one, when a lot of your purchases are on dining and travel, you’ll be earning 2X on your purchases. Also, if you can compliment the Sapphire Preferred with cards like the Freedom (Classic) or Freedom Unlimited (both with no annual fees) you can bolster your earnings even more so that your earning plenty of Ultimate Rewards.

I’ll use a real world example to illustrate the value you can achieve. 

Let’s say you’re using the Sapphire Preferred and Freedom Classic. Assume you’re halfway maxing out the Freedom quarterly categories so you’re earning 15,000 Ultimate Rewards from that. Now, let’s say you put $30,000 a year on your Sapphire Preferred and that $5,000 of that is on travel and $5,000 on dining. That would be a total of about 55,000 Ultimate Rewards earned. 

Now let’s look at a possible redemption 

I recently used Ultimate Rewards to book a Singapore Airlines first class suite flight from Tokyo to Singapore where I redeemed 51,000 Ultimate Rewards for a ticket that would have cost me $5,365. With the $23 fees factored in, I redeemed those points for a little over 10 cents per point

So by “investing” $95 into paying my annual fee, I was able to earn and transfer 51,000 Ultimate Rewards that came out to over $5,000 in value! 

It is this kind of return in value just demonstrated that makes travel rewards credit cards with annual fees worth the money!

A quick word on opportunity costs 

It’s important to keep in mind that just because you are offsetting the annual fee with your earnings, that doesn’t mean that you should keep a card with an annual fee. You should always examine opportunity costs and weigh if your spend could be better utilized on a different card.

Benefits

In addition to points earned from spending, many credit cards offer benefits and perks, such as free anniversary nights at a hotel that can more than make up for the cost of the annual fee.  A prime example is the IHG credit card with its low $49 annual fee (waived the first year). It’s very easy to come out on top with a deal like that where you can book a room that would normally cost you a couple hundred bucks for free.

Other cards may offer perks like lounge passes or travel credits and these benefits can easily come close to cancelling out the annual fee. The key to obtaining real value with these type of benefits it to ask yourself: “would I normally spend X amount of money on Y travel purchase?” If the answer is no, then it’s hard to say that your annual credit is truly “saving” you money and you may want to reconsider if the value of that particular benefit is applicable to you. 

Final word

The take-a-way here is that you should not be turned off by credit cards just because they have annual fees. You might be able to get retention offers or product change your card so that you can reap the benefits of the sign-up bonus and spending and not be subjected to the annual fee. In addition, even if you do have to pay the annual fee, it’s very easy to earn enough rewards on many of these cards to offset whatever you’d be paying for your annual fee and reap tons more in value.

UponArriving has partnered with CardRatings for our coverage of credit card products. UponArriving and CardRatings may receive a commission from card issuers. Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

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