How To Justify A Credit Card With An Annual Fee?

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On Saturday I wrote a post about simplifying my parents’ credit card strategy. I realized that I had overcomplicated my parents’ credit card strategy to the point that they were using the wrong credit cards altogether. And that’s totally my fault, since I realized my focus should have been on giving them a simple strategy they can follow easily, rather than trying to maximize the return on every dollar they spend.

As I explained, I convinced them to take this approach:

  • Use the Chase Sapphire Preferred® Card for all dining and travel purchases including parking, as they’ll earn 2x points.
  • Use the Amex EveryDay® Preferred Credit Card for everything else. They’ll earn 3x points at US supermarkets (on up to $6,000 of spend per year), 2x points at US gas stations, and 1x point per dollar spent on everything else. They’ll also get a 50% bonus when they make at least 30 purchases per billing cycle (which they’ll do), meaning in reality they’ll be earning:
    • 4.5x points at supermarkets
    • 3x points at gas stations
    • 1.5x points on everything else

Reader JimT asked an interesting follow-up question in the comments section:

We use the original AMEX 5% Blue Cash card (since 2004) for gas, groceries, drugstore, and Costco. I acquired the AMEX SPG in 2013 and started using that for Costco and much (but not all) un-bonused spend. Cable, cell phone, and utility bills load automatically onto a Citibank Double Cash card which also gets used for some un-bonused spend by me. A Capital One Quicksilver card gets used when AMEX isn’t accepted by my wife and will be used as the future Costco card. I also have a no annual fee AMEX HHonors card and the Chase Marriott Premier which get light use at restaurants and each hotel brand (no general spend at all).

I regulate the amount of AMEX SPG spending to not accumulate points to avoid devaluation. When I first got the AMEX SPG, returns of 2% to 4.5% were not hard but with recent devaluations and the annual fee increase, I have a hard time justifying my keeping the card. Thus, how do many of you folks justify one or multiple of these premium rewards credit cards with $95 annual fees? When I review potential redemption rates, I can easily justify keeping the AMEX SPG at a $65 annual fee but the ~20k spending for the $95 annual fee just does not seem worth it. I have tried to justify the Chase Sapphire Preferred card on a similar basis but it just does not add up – the no annual fee 2% cash back card beats it most of the time. Is the only answer to be a road or travel warrior and frequent international flights or what?

Big picture, what should prompt someone to acquire a “premium” credit card and pay an annual fee on it? And under what circumstances does it just not make sense?

Decide what kind of rewards you want

This might sound simple, but it really isn’t. When deciding on rewards, the first thing to consider is whether you want to accrue a “cash back” style currency, or a traditional mileage currency.

The baseline should be that you can earn 2% cash back on a credit card with no annual fee, on cards like the Citi® Double Cash Card. So that’s the rate of return to beat.

Cash back

Why get a card with an annual fee when you can earn 2% cash back every day without paying one? It can certainly be tough to justify, especially given how straightforward it is to value cash back. A return of 2% on every day spend is worth two cents per dollar. Period. End of story.

But it gets tricky when it comes time to value other points. How much is a Membership Rewards, Ultimate Rewards, or Citi ThankYou point worth? A couple of weeks ago Travis provided a great outline about how to go about valuing miles & points:

Some people will value a mileage currency at one cent per point, others will value it at three cents per point. It really does vary. And there’s no right or wrong answer.

But you do have to ask yourself the fundamental question of how you want to be rewarded for your credit card spend — do you want to have more cash in your pocket, or do you want points towards an aspirational experience you might not otherwise be able to afford?

It’ll take a lot of cash back to redeem for an Etihad A380 First Class Apartment

How to justify cards with annual fees

When it comes time to justify cards with annual fees, how do you go about it? How do I have well over a dozen cards with annual fees I gladly pay a year, and still feel like I’m getting a great deal?

Justify it for the perks

For some cards, justifying an annual fee is as simple as looking at the perks. For example, the IHG® Rewards Club Select Credit Card offers a free night certificate upon your account anniversary each year, plus Platinum status for as long as you have the card. For almost anyone, that will more than justify the $49 annual fee.

A 429GBP/night room for free using a free night certificate on a $49 annual fee card? Yes please!

Some perks aren’t quite as concrete. For example, the Citi® Hilton HHonors Reserve Card offers Gold status for as long as you have the card. That can pay for itself as quickly as one stay, given that it gets you free breakfast/lounge access. At some hotels, that would easily retail for $100+ per night.

Breakfast at hotels like the Conrad Hong Kong can be worth quite a bit

The same is true on the airline front. Cards like the Citi® / AAdvantage® Platinum Select® World Elite™ Mastercard® offer a first checked bag free (for you and up to four companions on the same reservation), plus priority boarding, a 25% discount on in-flight food & beverage purchases, and a 10% rebate on miles redeemed (up to 10,000 miles per year). Again, that can justify the annual fee after just one trip.

A first checked bag can cost $25 each on American

Justify it for the sign-up bonus

Credit cards with annual fees typically offer better sign-up bonuses than cards without annual fees. That makes perfect sense, since the upside for the card issuers is greater. That’s why it’s so common to see 45,000-50,000 point sign-up bonuses on the “premium” cards, like the Chase Sapphire Preferred® Card and Citi ThankYou® Premier Card.

Now in theory you could apply for these cards and close them before the annual fee hits (they have waived first year annual fees), but in most cases I actually find the cards to be worth keeping beyond that. Furthermore, do keep in mind that one aspect of your credit score is your average age of accounts, and you want that to be as high as possible. My average age of accounts is one of the reasons my credit score is so high.

Justify it for the return on everyday spend

The Citi® Double Cash Card offers the equivalent of a return of 2%. The Amex EveryDay® Preferred Credit Card offers a minimum return of 1.5 Membership Rewards points per dollar spent when you make at least 30 transactions per billing cycle. I value those points at 1.8 cents each, so to me that’s a return of 2.7%.

The card has an annual fee of $95, so keeping in mind the “spread” of 0.7 cents per dollar spent, you’d have to spend ~$13,500 on the card per year to breakeven. What this doesn’t account for is the huge number of bonus points you can earn on grocery (up to 4.5x points) and gas (up to 3.0x points) purchases. That can quickly tip the scale in the favor of the Amex, even with much lower average spend.

Big picture bottom line

The truth is, the more you try to crunch the numbers down to a science, the fuzzier the math gets. That’s because for a vast majority of us, it’s impossible to guess exactly what our spend profile will look like over the coming year(s). Beyond that, while we can make every effort to place a valuation on specific points currencies, values do change over time. So when you can’t perfectly predict your spend profile, and can’t perfectly predict what points are worth, it makes it difficult to make educated decisions.

Some cards are worth acquiring for the perks alone. Some cards are worth acquiring for their return on everyday spend. And some are a combination of both.

But big picture, I feel like it’s tough to go wrong with the mid-range cards offered by Chase, Citi, and American Express — specifically, the Chase Sapphire Preferred® CardCiti ThankYou® Premier Card, or the Amex EveryDay® Preferred Credit Card. You do pay a sub-$100 annual fee, but you get bonus points on common spend categories. At a minimum, choose the card which offers bonuses in the categories you spend most in.

At least I think the above is true if you do value aspirational travel. 2% cash back on the Citi® Double Cash Card is great, and something a lot of (most?) people should consider. But it’ll take a lot of spend before you get that Cathay Pacific first class ticket to Asia.


Once you factor in the huge sign-up bonuses on many of these mid-range cards, I think they become even more compelling.

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  1. Wow, what a way to spam is with about 25 credit card links.

    Here’s a random pointless question for your next post:

    How many cards would you recommend having at one time?
    And do you know if any HSBC or other bank cards are any good – or is it just the ones that have referral links?

  2. Thanks for this post Lucky. I was just approved for the American Express Platinum, and I was struggling to justify the $450 annual fee. Of course, 40,000 MR points the first year is great, but what about keeping it year after year. No one can answer that except for me. Here is my breakdown of the justification:

    Annual Fee: $450
    United Airline Reimbursement: $200 – I plan to use this with MileagePlus X
    Roadside Assistance: $50 – I am going to cancel my AAA as this card comes with Premium Roadside Assistance
    Lounge Access: $200 – I am not sure about the use from the Priority Pass yet, but I will most certainly take advantage of the Centurion lounges. I travel to Vegas at least 4x a year for work, and this will keep me from gambling at the airport!
    AMEX offers: $100 – Based on the savings from my SPG AMEX last year, I am anticipating saving $100 per year just by using the offers:

    So, by having this card, I am getting $550 in benefits. This does not include SPG Gold which I never hit on my own. Its a keeper in my book.

    Now the question, do I also keep the SPG AMEX card? When it was a $65 annual fee (and before I had the Plat card), I could justify it. Now with the Plat card and $95 annual fee, I don’t think Ill be keeping it. Most of my travel is business related, and I have to use my corporate AMEX travel card.

  3. I like these sort of posts. It really helps breaks things down. As a student, I recently found out about the Sallie Mae Mastercard. The 5% back on groceries, gas, and books (Amazon) is really tough to beat. I’ve found myself using excel to compare fee/no-fee cards to find out what works for me based on how much I spend in different categories. It’s a detailed but fun process!

  4. I can’t understand why people would worry about a $95 Amex annual fee. Amex Offers will easily save you over $100 a year, folks!

  5. I don’t understand your point about the signup bonus. Once you get the bonus, that ceases to be a reason to keep the card. In no universe is a minor adjustment to your average age of accounts worth $95.

  6. You forget one of the main point with Amex cards: any Amex card is justified after the use of Amex offers. I think I have saved this year in excess of $3000 with these offers (using the offers on extensions). The directv offer alone in my business cards saved me more than $800 in my bill. Also the ATT offer was very good,. During the small busines day last year I saved $600. Whats not to love?

  7. What do you think about downgrading SPG Amex to the Hilton Amex which now has 60K signup bonus and no annual fee? Only issue is that for non-bonus spend, Hilton gives 3 points, which is maybe 1.5 cents per dollar.

  8. @Joe

    Don’t downgrade since you will not get the bonus…and will not be able to get it in the future. Cancel the SPG if you want and then sign up for the Hilton card.

  9. @Lucky: No love for the AMEX Platinum?

    @Vickers: And don’t forget about the FHR program. That alone justifies the annual fee for me. Recently stayed at a Ritz-Carlton for 10 days on FHR. Breakfast would have cost me 40 USD per person. FHR got me free breakfast for 2 (outside of the US this has always been full breakfast) saving me 80 USD per day. And all that with a nice upgrade to a huge suite.

  10. The Amex Platinum Priority Plus offers medical evacuation coverage. I have thankfully never had to use it, but its nice to know that if I need services where they are substandard Am Ex will pay to get me somewhere where the care is much better. At least that’s the promise.

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