Four Reasons Not To Freak Out Over Annual Fees

So you got to this site by the promise of an awesome deal. Then, buried near the bottom of the post, we mention that the card you need to use comes with a $450 annual fee! What gives?

Our favorite cards, and their annual fees, are:

After the waived first year annual fees, carrying these four cards would cost you $1,190 per year. That does sound crazy!

Using these four cards as examples, let's go over four reasons to not be scared away by annual fees. Remember, your circumstances will vary based on card selection. We're not saying it necessarily makes sense to have all four of these cards!! We're just using them individually as examples for how annual fees can be justified.

1. The signup bonus will always be more valuable than the first year's annual fee

We almost never endorse getting a card with an annual fee when it doesn't have a generous signup bonus. We specifically don't advocate most readers pick up the Citi Prestige (despite our love for it), which as of this writing does not have a signup bonus. 

A 50,000 signup bonus on any of the above cards is easily worth $500, so you'd be net positive once you earn the signup bonus. For cards with waived annual fees the first year, this is an easy win. For cards with first year annual fees, you're still making some money on the deal. But hey, you wanted 50,000 FREE points, not to waste your time and energy to pay $450 for 50,000 points! So look onto number two.

2. Annual Fees Are Somewhat Offset By Travel Credits

Travel Credits and "Effective Annual Fees"

Each of these cards, except for the $95 per year Chase Sapphire Preferred, has a travel credit you can use on certain travel expenses. For the Reserve it is $300, for the Prestige $250, and for the Amex $100. That means if you can find a way to use these credits on things you were going to buy anyways, your annual fee is effectively decreased. After travel credits, the "net" or "effective" annual fees for these cards are:

  • Chase Sapphire Reserve - $150

  • Citi Prestige - $200

  • Chase Sapphire Preferred - $95 (no travel credit)

  • Amex Premier Rewards Gold - $95

Again, you have to be spending these credits on things you would have bought anyways. If you use them to fund new travel, you're going to lose money. Assuming that's the case, though, now it only costs you $540 to carry all four of these cards annually. That's not nothing, but it's a nice drop from the $1,190 we started at.

Double Dipping Travel Credits

What's more, sometimes you can get these credits twice in the first cardmember year because some are given by calendar year. Of course, if you keep the card beyond your first year, you only get one credit per year you pay the annual fee. As of this writing, double dipping works with the Citi Prestige and Amex Premier Rewards Gold (you should double check with Google for the current status), but it does not work with the Chase Sapphire Reserve.

3. You don't have to keep these cards longer than a year

You can almost always downgrade (or "product change") your card to a no-fee option after the first year to avoid the second year's annual fee. The no-fee card will not give you the great benefits of the better card, but it will just sit their keeping your payment history pristine and your credit utilization low.

If no downgrade options are available (a rarity), you can cancel the card, though this is always a last resort, as it will look bad on your credit report. In some cases, downgrading is an awesome choice. We both signed up for the Chase Sapphire Preferred to get the signup bonus. Once we got it, one of us downgraded to the Chase Freedom Unlimited, which was a great add to our card portfolio. If we didn't already have it, downgrading to the Chase Freedom would have been a great option as well. What about the other Preferred we had, well, onto number four.

4. Sometimes the cards are just worth the annual fee!

After travel credits, justifying annual fees comes down to two things: math and perks.

Why Math Matters

We're going to cover a bit of math here to save us space below. We'll use cash back cards as an example, but you should be able to see how the principles transfer to points. If Card A earns 1% back on all spending and Card B earns 2% back on all spending with a $100 annual fee, you need to spend $10,000 in a year to justify the annual fee for Card B. If this isn't obvious to you, we encourage you to take a minute with a pad and paper to understand it.

Since different cards earn points at different rates in different categories, justifying an annual fee (or a more expensive fee over a cheaper fee) is partly just about whether you'll earn enough points with the more expensive card.

Why And When Perks Matter

Perks only matter if you're using them to save money! Let's say you had three trips of three nights each planned this year, and you get the Citi Prestige for it's 4th Night Free perk. You add 4th nights to every trip. In that case you have not saved money, you've just extended your trips. Similarly, if you get lounge access but don't use it to actually save on money you would have spent at the airport or on meals, you're not actually saving. Obviously these perks can be worth a lot, but it's all about how you use them.

Now, let's cover the above-listed cards one at a time to see why we think they're worth the annual fee.

Chase Sapphire Preferred

The case for the Chase Sapphire Preferred is simple. You need an annual fee card to get the most out of your Chase Ultimate Rewards points. In a household, you have to pay at least $95 a year for the privilege of transferring your Chase Ultimate Rewards points to partners because you need to hold one of the: Chase Sapphire Preferred, Chase Sapphire Reserve, Chase Ink Business Preferred. Given that this is the only sensible way to use your points to fly long-haul, international, premium cabin flights, the $95 per year isn't so bad.

The card has other great travel perks, too, like its 2X earning on travel and dining and its travel insurance/protection perks. But being able to transfer Chase Ultimate Rewards points to partners is easily worth $95. With Chase Ultimate Rewards partners including United, Singapore, and Southwest, theres just no reason anyone who travels at least once a year shouldn't pay for access to the transfer partners.

If you don't transfer points, then you need to justify the Chase Sapphire Preferred over a standard 2% cash back card. That comes down to math. The Chase Sapphire Preferred allows you to book travel with your points at a rate of 1.25 cents per point. This means that on travel and dining expenses, you're essentially getting 2.5 cents back per dollar spent (assuming you travel enough to use those points). At that rate, you need to spend $19,000 on travel and dining annually to cover the $95 annual fee vs. a $0 fee 2% cash back card.

But the Chase Sapphire Preferred also makes all your other Chase Ultimate Rewards points 25% more valuable, as it allows you to use them for 1.25 cents each to book travel. So if you earn 38,000 points on any Chase Ultimate Rewards cards in a year, it can make sense to keep the Chase Sapphire Preferred.

Even if another household member has a Chase Sapphire Preferred or Reserve, you might still want to have this card. This is mostly a matter of where your airline miles end up. For example, if Andy and Ben are a couple with 20,000 miles in each of their United MileagePlus accounts, the would each need a Chase Ultimate Rewards card with an annual fee if they wanted to transfer 5,000 miles each to United for a 25,000 roundtrip domestic ticket. If only Andy had the ability to transfer points, they would need to come up with 30,000 points to transfer into his United account to pay for two round-trip domestic tickets.

Chase Sapphire Reserve

The Chase Sapphire Reserve's $450 annual fee is among the highest in the business. Right off the bat, though, the very generous $300 travel credit brings it down to a net $150 annual fee. Putting the Chase Ink Business Preferred aside for the moment, the question of whether you should carry the Chase Sapphire Reserve or Preferred essentially comes down to math and the $55 difference in their effective annual fees.

The Chase Sapphire Reserve makes points 20% more valuable than the Chase Sapphire Preferred. The Chase Sapphire Reserve allows you to use points to book travel at 1.5 cents per point, while the Preferred sits at 1.25 cents per point.

The Chase Sapphire Reserve earns 3X points on travel and dining (compared to the Preferred's 2X). If you value your points earned on the Chase Sapphire Reserve at a paltry 1.5 cents each (and 1.25 cents for the Preferred), you only need to spend $2,750 on travel and dining in a year for the card to be worth the premium over the Chase Sapphire Preferred.

The Chase Sapphire Reserve comes with Priority Pass. You get this benefit with lots of cards these days, but the Priority Pass membership with the Chase Sapphire Reserve is worth $55 easily for many travelers, especially given its generous guesting policy.

Citi Prestige

The Citi Prestige's $250 air travel credit is easy for us to use, so we're left with $200 of value to cover. The Citi Prestige annual fee is easily overcome by using 4th Night Free once or twice each year.

Amex Premier Rewards Gold

Once you use the $100 travel credit, the effective annual fee on this card is down to $95. Unlike Chase's Ultimate Rewards Program, you can actually keep full access to Amex's Membership Rewards Program with a no-fee Amex EveryDay Credit Card. We value Chase Ultimate Rewards Points more than Amex Membership Rewards points, which makes this a tougher fee to justify.

However, if you were just comparing Amex cards, the math tells you the Premier Rewards Gold is worth holding if you spend $4,750 on flights booked through airlines, $9,500 at gas stations or restaurants, or some combination of lesser amounts in those categories. You'd also want to keep in mind the perks related to travel insurance / protection in evaluating this card.

The Amex Premier Rewards Gold card is also worth it if you utilize the Amex Hotel Collection, where you can get a $75 hotel credit and complimentary room upgrades on certain stays.

What If A Card Isn't Worth The Annual Fees?

If you decide a card isn't worth the annual fee, the last thing you want to do is just close the account. The first thing you want to do is inquire with the issuer about a "product change." For example, the Chase Sapphire Preferred can often be changed to the Chase Freedom or Chase Freedom Unlimited. These are no-fee cards. Why do this rather than closing the account? For the sake of your credit score! You want to keep you credit utilization low and your credit history long.

Finally, before you do anything, make sure you know what will happen to your points. Depending on the program, you may lose them, lose some of their value, or have nothing at all happen to them.

Closing Thoughts

We don't recommend carrying a bunch of high annual fee cards just to be fancy. Actually, in no case have we recently signed up for a card with a first-year annual fee where we did not have a plan to immediately get exceptional value out of that card. Both of the Sapphire Reserves we hold earned us 100,000 Ultimate Reward Points in signup bonuses (good for $1500 in travel). We used the Citi Prestige to save over $2000 on a trip to Disney World. Including the travel credits that we used, we paid $1,350 in annual fees on these cards for $5,600 of value.

What's Next?

By now, you should now know what travel hacking is, whether it works for you, the basics of points and miles, how to go out and earn a signup bonus, and whether or not to keep the card once you earn the bonus. But before you run out and start earning points, there are a few more things you should know...