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For a lot of people, paying an annual fee to use a credit card is out of the question. For some, the very idea is an outrage. But often, this attitude is more emotional than rational. In fact, many credit card users have more to gain by paying an annual fee — and in some cases, even a very high annual fee. Here’s why.
Why annual fees can make sense for cash-back cards
Would you pay $100 to save $200? Of course you would, but this logic isn’t clear to devotees of cards that charge no annual fees. To see how you can come out ahead paying a fee, compare cash-back cards that come in versions both with and without an annual fee.
For example, American Express offers the Blue Cash Everyday® Card from American Express and the Blue Cash Preferred® Card from American Express. The $0-annual-fee Blue Cash Everyday® Card from American Express offers 3% cash back on up to $6,000 per year at U.S. supermarkets, 3% cash back at U.S. gas stations on up to $6,000 per year and 3% cash back on U.S. online retail purchases on up to $6,000 per year, then 1% back once you've reached the maximum. Terms apply.
The Blue Cash Preferred® Card from American Express has a $95 annual fee but pays 6% cash back on up to $6,000 per year at U.S. supermarkets and on select U.S. streaming services, 3% cash back at U.S. gas stations and on transit purchases (such as taxis, rideshare services, parking, tolls and trains), and 1% cash back on all other purchases. Terms apply.
With a little math, the choice is clear. If you spent just $265 each month on groceries using the Blue Cash Preferred® Card from American Express, the additional 3% cash back (for a total of 6%, as compared to the 3% earned on the card without an annual fee) would equal $95. Spend more than $265 and you’re coming out ahead while also getting 6% back on streaming services like Netflix and Spotify, and 3% back on transit purchases and gas. Terms apply.
These two AmEx cash-back cards aren’t outliers. You can reach similar conclusions if you compare cards like the $0-fee Capital One SavorOne Cash Rewards Credit Card, which pays 3% cash back on dining, entertainment, popular streaming services and at grocery stores (excluding superstores like Walmart® and Target®), plus 1% on all other purchases, with the Capital One Savor Cash Rewards Credit Card, which pays 4% cash back on dining and entertainment plus a welcome bonus: Earn a one-time $300 cash bonus once you spend $3,000 on purchases within 3 months from account opening. The annual fee is $95.
» Learn more: Best cash-back credit cards
Why high-fee premium travel rewards cards can make sense
Credit cards that earn travel rewards can often get you even more value than you would get from a cash-back card. And while there are some travel rewards cards with no annual fee, they are typically poor substitutes for the premium versions that carry an annual fee.
For example, take the Delta SkyMiles® Blue American Express Card, which has a $0 annual fee, and compare it to the Delta SkyMiles® Gold American Express Card, which has an annual fee of $0 intro for the first year, then $99. Both cards offer 2x miles at restaurants worldwide, including takeout and delivery in the U.S. and at U.S. supermarkets, and on Delta purchases, plus 1 mile per $1 spent on all other eligible purchases. But the Delta SkyMiles® Gold American Express Card also offers 2x miles at U.S. supermarkets, and a free checked bag on Delta flights. Terms apply.
The Delta SkyMiles® Gold American Express Card also offers new applicants a nice welcome bonus: Earn 40,000 bonus miles after you spend $1,000 in purchases on your new Card in your first 3 months. Terms Apply. The Delta SkyMiles® Blue American Express Card has a smaller welcome bonus: Earn 10,000 bonus miles after you spend $500 in purchases on your new Card in your first 3 months. Terms Apply.
You can see this pattern over and over again when comparing travel rewards cards that charge an annual fee against their no-annual-fee counterparts.
Why huge annual fees on ultra-premium cards can make sense
Several ultra-premium travel rewards cards have annual fees in the $450 to $600 range. Though these pricey cards aren’t for everyone, many frequent travelers can easily justify those annual fees. For example, the Chase Sapphire Reserve® has a $550 annual fee. In return, cardholders get a $300 annual travel credit and a $100 credit toward Global Entry or TSA PreCheck every four years. If you count the Global Entry or TSA PreCheck credit as being worth an average of $25 per year and add in $60 for DoorDash, you're quickly over $400 in just statement credits.
Plus, you get up to 10x points on Chase dining, hotel and car rentals booked through Chase Ultimate Rewards®, 5x points on air travel booked through Chase Ultimate Rewards® and 50% more redemption value when you use your points to book travel through Chase Ultimate Rewards®.
Then there's the Capital One Venture X Rewards Credit Card with its $395 annual fee. This card also comes with a $100 Global Entry or TSA PreCheck credit and up to $300 in credit for bookings made through the Capital One Travel portal, easily covering the annual fee. You'll also get 5x miles on flights booked through the Capital One Travel portal, 10x miles per dollar on hotels and rental cars booked through the portal and 2x miles on everything else.
The Chase Sapphire Preferred® Card charges a much lower annual fee: $95 and gets the same 3x on dining and a lower 2x on travel booked outside of the Chase Ultimate Rewards® portal. But because you’re missing out on the travel credit and Global Entry or TSA PreCheck credit, your real savings aren’t what they seem. With the Chase Sapphire Preferred® Card, you get only up to 5x points and 25% more redemption value when you book in the Chase travel portal.
Plus, Chase Sapphire Preferred® Card customers miss out on benefits like a Priority Pass Select membership (which gives you and up to two guests access to over 1,300 lounges around the world and credits of $28 per person, per visit at many airport restaurants) and 10x points on Lyft purchases (compared to the less expensive card’s 5x points on Lyft).
With these benefits, Chase Sapphire Reserve® cardholders can get a lot more value than holders of the lower-annual-fee card — more than enough to offset the price difference. Again, you see the same value when comparing ultra-premium cards like The Platinum Card® from American Express and other lower-fee AmEx travel cards.
» Learn more: Chase Ultimate Rewards®: How to earn and use them
The bottom line
You can be an extremely frugal person yet still see the value in paying a high annual fee to use a credit card. So long as the value of the benefits you receive exceeds the cost of the annual fee, you’ll always come out ahead.
The information related to the Capital One Savor Cash Rewards Credit Card has been collected by NerdWallet and has not been reviewed or provided by the issuer of this card.
How to maximize your rewards
You want a travel credit card that prioritizes what’s important to you. Here are our picks for the best travel credit cards of 2022, including those best for:
Flexibility, point transfers and a large bonus: Chase Sapphire Preferred® Card
No annual fee: Bank of America® Travel Rewards credit card
Flat-rate travel rewards: Capital One Venture Rewards Credit Card
Bonus travel rewards and high-end perks: Chase Sapphire Reserve®
Luxury perks: The Platinum Card® from American Express
Business travelers: Ink Business Preferred® Credit Card