Is an Annual Credit Card Fee Ever Worth It? The Answer Will Surprise You

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For years, I had a rule about credit cards: Never get one that has an annual fee.

There are so many great cards with no fee, after all. But sign-up bonuses and better rewards finally changed my mind.

It started with the Hyatt Credit Card. A sign-up bonus convinced me to apply, but I’ve kept the card for years, happily paying the $75 annual fee. Aside from various other benefits, the anniversary award night (a free stay at a category 1 to 4 Hyatt each year) makes it well worth it, because my wife and I typically spend more than $75 for a room in hotels that aren’t nearly as nice.

Since I signed up for the Hyatt card, I’ve applied for a number of credit cards with annual fees — and sometimes large ones. Very few of them are worth keeping beyond the first year, at least for me.

So how do you decide whether a credit card with an annual fee is a good deal for you? Let’s look at some of the factors by starting with an example of a card I just received…

Is This Card Worth the $95 Annual Fee?

I recently applied for and received an American Express Blue Cash Preferred card as an upgrade from my Blue Cash Everyday card. One of the primary benefits is the incredible 6% cash back you earn on grocery purchases. No other card offers that, as far as I know.

The reason I’m happy to pay the $95 annual fee for the first year is the bonus it offers: After spending $1,000 on the card in the first three months, I’ll get a $150 statement credit. That will leave me $55 ahead, plus I will earn the usual cash back on those purchases (as much as $60 if they’re all grocery purchases).

Clearly, a good sign-up bonus is one reason to get a card with an annual fee.

Interestingly, until a few days ago, the bonus was $250 for the Blue Cash Preferred, at least for new cardholders. (I qualified for only $150 because it was an upgrade of an existing card.) These bonuses go up and down, so watch for a deal.

At the moment, the Blue Cash Preferred card also pays 10% cash back (up to $200) on Amazon purchases for the first six months. That could be worth a lot if you regularly shop on Amazon.

And that 6% cash back on groceries — wow! So, will I keep the card and continue paying the $95 annual fee? Probably not. The math gets more complicated once you get beyond that initial bonus and the temporary benefits.

That 6% on groceries sounds great, and even with a $6,000 purchase limit per year, you could get up to $360 cash back. That more than covers the annual fee. Then, there is the 3% cash back you earn on gasoline. That might add another $45 to your cash back haul (based on annual gas purchases of $1,500).

But that’s not the end of the story. For example, I get 3% back on gas with one or two of my other no-fee cards (and 5% back at the moment with my Discover card), so this benefit is of no additional value. And then, there is the fine print and other considerations when it comes to those grocery purchases.

And what, exactly, counts as a grocery purchase? Even a look at the explanation offered by American Express doesn’t make it all that clear. What is clear is that purchases at Walmart Supercenters do not qualify. That’s where I buy most of my groceries! And it certainly doesn’t make sense to pay 10% or 20% more elsewhere just to get 6% cash back.

When I take a closer look at where I shop and how much I spend, I estimate that, at most, about $1,500 of my grocery purchases annually will qualify for the 6% cash back. That would make me $90 — not enough to cover the $95 annual fee.

But there’s even more to it than that. Suppose you project $2,000 in qualifying purchases, earning you $120 in cash back (the 6% reward, not the bonus). It would seem that the card is worth it then… until you consider the cash back you can earn with a no-fee card.

For example, you can get 2% cash back with a Citi Double Cash card, which has no annual fee. That would net you $40. Subtract that from the potential $120 you might make with the Blue Cash Preferred card and you would be only $80 ahead on cash back rewards (not counting the bonus) — not worth a $95 fee.

You can see why I’ll drop the card before the next fee is due (but it was worth having temporarily thanks to the $150 bonus — more on that consideration in a moment).

You can boost the value of the card with tricks like buying gas station gift cards in grocery stores to get 6% cash back on those. Strategies like that can make a card worth the fee, and I’ve used them often. But in my experience, there are usually better options with fee-free cards. For example, I’m getting 5% cash back this quarter with my Discover card, so buying gas cards to get 6% with the Amex card would result in an additional value of just 1%, which might not change the calculations enough to justify the extra work (but if you drive a lot, maybe it works for you).

Here’s how to analyze credit cards to decide which are worth the fee after you’ve earned any one-time bonus:

1. Calculate what you’ll make with the new card.

2. Subtract what you would earn with a no-fee card you already have or could easily get.

3. Your total should be more than the annual fee for the card; otherwise, you should cancel it.

When you do the math the right way, based on your normal spending patterns and taking into account the existing benefits on your no-fee cards, most cards with an annual fee are not worth keeping. But “keeping” is the operative word here. Many of them offer sign-up bonuses that make them a great deal to have for less than a year. For example…

I Just Collected a $500 Credit Card Bonus

My American Express Premier Rewards card has a $195 annual fee. That’s pretty expensive — so what are the benefits? Well, the best one seems to be that it pays three points per dollar on airfare. Hmmm… I use other cards to get free flights much of the time. And two points per dollar for gas stations? I get 3% on a fee-free card.

It does offer an airline fee credit of “up to $100 per calendar year in statement credits when incidental fees, such as baggage fees and other incidentals, are charged by the airline to your Premier Rewards Gold Card.” But I never have baggage or other incidental fees; I travel light.

The bottom line is that I can’t imagine any way to get $195 in value annually from this card. So why do I have it?

It offered me 50,000 points for spending $2,000 on the card in the first 90 days, and American Express waived the annual fee for the first year. I finished off the spending requirement last month and had a total of 52,450 points in my account.

Now, the calculation can get tricky here, once again, because these are points with various redemption options. For example, many of the $25 gift cards offered cost 3,500 points. Fortunately, the Home Depot cards are one penny per point, and we just moved to a new home that needs things like a bedroom door, screen door and patio pavers.

I’m almost through spending the $500 in gift cards I received. Since we shop at Home Depot regularly, it was almost the same as getting $500 cash. I’ll charge another $50 on the card to round my remaining points up to $2,500, which will get me another $25 Home Depot gift card before I cancel the account.

Of course, that $2,250 or so in normal spending that I put on the card, which earned me a total of $525, would have netted me $45 in cash back on my Citi Double Cash card. So my real net benefit from the new card is only $480 ($525 minus the $45). That’s still a pretty good haul.

It would have been a good deal even if Citi didn’t waive the fee for the first year (in which case, my net benefit would have been $285). So here’s a basic formula for analyzing the benefits of getting a card with a fee to earn a sign-up bonus:

1. Start with the cash value of the bonus.

2. Add any additional cash value earned by meeting the spending requirements.

3. Subtract the cash value the spending would have earned on cards you already have.

4. Subtract the annual fee (if not waived for the first year).

The result is your net cash value benefit.

When It’s Time to Cancel Your Credit Card Over the Fee

And then, of course, if you don’t want to lose much of that benefit, remember to cancel the card before the next annual fee is due. There are also two alternatives to canceling the card.

First, you can threaten to cancel, making it clear that you’ll do so because of the annual fee. The fee may be waived for another year. This tactic used to work well in years past (I had several fees waived), and it might still be worth trying.

If the credit card issuer won’t drop the fee, you might be able to downgrade to a fee-free version of the card, sometimes keeping the same account number and some of the benefits. For example, instead of canceling my Blue Cash Preferred card, I might ask for a downgrade to the fee-free Blue Cash Everyday card, which still pays 3% cash back on groceries.

Yes, it can be great to have credit cards with big annual fees… at least for a little while.

Your Turn: Do you have any credit cards that have an annual fee? Are they worth it?

Steve Gillman is the author of “101 Weird Ways to Make Money” and creator of He’s been a repo-man, walking stick carver, search engine evaluator, house flipper, tram driver, process server, mock juror, and roulette croupier, but of more than 100 ways he has made money, writing is his favorite (so far).