It All Becomes Clear
I’m a big fan of financial efficiency. If it is possible to get a discount on something I’m going to buy anyway, I’m all for it.
So it isn’t a big surprise when people inquire about call me out for paying annual fees in comments and email.
“Why would you pay a credit card company just for the privilege of making them money?”
“Isn’t it a waste to pay an annual fee when there are so many free credit cards out there?”
“Why would you pay a credit card annual fee? That is just dumb.”
I can certainly relate to the sentiment behind these questions. But if we strip away the emotion and just use the cold hard reason of accounting, it all becomes clear. We pay a fee now with the expectation that we will get something of equal or greater value.
Let’s check out a few…
Examples
Costco
A question in the intro comes verbatim from a conversation with a friend a few weeks ago in San Francisco:
Friend: “Why would you pay a credit card annual fee? That is just dumb.”
Me: Do you have a Costco membership?
Friend: “Yeah, of course.”
Me: Same thing.
Entry and use fees exist in many different forms; concert and sporting event tickets, Amazon Prime, Costco memberships, and yes… credit card annual fees.
The question is, “Is it worth it?”
Just a few days ago we renewed a Costco membership in Taipei for 1,350 TWD (~43 USD.)
10 minutes later we had 2 giant boxes of Pampers diapers in our cart, saving nearly $18 off each box ($0.09/diaper) when compared to the local grocery store price. (Still more expensive than US Amazon prices though.)
We still have a whole year of diaper use ahead of us, and we saved the cost of membership in just our first visit. That is a potential 500%+ return on investment, even if we only buy diapers.
$167 of Raw Purchasing Power
Free Hotel Nights
The IHG Rewards Club Mastercard has an annual benefit of a Free Night Certificate that can be used at any of the 4,900 IHG hotels worldwide. These include Intercontinental, Holiday Inn, and Crowne Plaza.
If we attend an upcoming wedding, we’ll probably use this year’s free night at the Intercontinental in Hong Kong.
Infinity Pool at Intercontinental Hong Kong
At last look a weekend night costs $287 + tax, but we’ll pay only the $49 annual fee for the IHG card, a 585% return on investment.
Flights and Baggage Fees
A few months ago I was booking 1-way flights from Minneapolis to San Francisco with a 2-week stopover in Seattle. The cost was ~$275 each for 2 adults ($550+ total.)
Digging deeper, baggage fees were going to be $25 each per segment, a total of $100.
Instead, I applied for the Alaska Airlines Visa Signature Credit Card which has a $75 annual fee. After $1k minimum spend I received 31,000 miles. With 12,500 miles I was able to book those $275 flights for only $11.20 in taxes (total 25k miles and $22.40), leaving 6,000 miles for future use.
The Alaska Airlines card also allows 1 free checked bag per passenger, eliminating our need to pay checked bag fees.
In essence, for $75 and $22.40 in taxes we avoided spending over $650.
This $75 annual fee is one of the best $75 expenses I’ve ever had, returning 867%. And this is without even using the Annual companion fare!
(I suppose if we want to be especially precise with our accounting, the $1k minimum spend could have been spent on a cash back card for a return of $15 – $20. But the 1,000 miles remaining also have a value of ~$18, so maybe it is a wash.)
Chase Sapphire Reserve
The newest credit card in our arsenal is the Chase Sapphire Reserve, which comes with a whopping $450 annual fee!
But that a bit misleading as one of the prime benefits of the card is a $300 travel credit. The first $300 in travel related expenses are waived, which reduces the effective annual fee to a more reasonable $150. On our first statement we received credit for parking meters in Santa Monica, Uber rides, and a one-night Airbnb stay.
This card pays 3 points per dollar spent on travel and dining. Each point is worth at least $0.015, so the break even point is about $3,000.
We sometimes spend over $3k on travel and dining in one month, which makes this card one of our best earners. On an (optimistic) annual basis this is a 1200% yield.
(The Chase Sapphire Reserve also offers Priority Pass lounge access and TSA Pre reimbursement, but we wouldn’t pay for them ourselves so I value these at $0.)
Credit Card Divorce
What if you reach a point where a credit card no longer has a place in your wallet? It’s not you, it’s me.
Before doing anything, make sure that any points you’ve earned with the card are not forfeit if the account is closed. This should only be an issue with cards that hold their own point system, not with hotel or airline cards.
Next, I call the phone number on the back of the card and ask to waive the annual fee. Maybe I’ll use the card benefits in the next year, who knows.
If the annual fee isn’t waived, then I’ll ask to close the account. Easy.
But sometimes they’ll agree to wave the annual fee or even offer a retention bonus. Either way it is a win.
Credit Score
What impact does closing accounts have to your credit score? Maybe you care about that. (I don’t.)
If so, there are two things that are good to watch out for.
- Don’t close the oldest credit card
- 15% of total credit score is determined by the length of time you’ve had credit. A CreditWise simulation of my credit shows an 8 to 10 point drop if I close my oldest account (still Excellent.)If the oldest credit card in your credit history has an annual fee that you no longer want to pay, you can usually ask a credit card company to downgrade to a no-fee card.
- Understand impact of reduction in available credit
- 30% of credit score is based on the amount owed, part of which is measured relative to total available credit. If you have only a few cards, closing one of them can drop total available credit by 30-50% or more, which can have a relatively large impact to score.Instead, ask the credit card company to transfer available credit to another card before closing the account.
For equal and opposite reasons, opening new credit accounts can raise credit scores.
Conclusions
I hate wasting money. The majority of fees should be avoided like the plague.
But many annual fees are not just worth it, they are more than worth it. We routinely get more than 500% return on investment, even using only a portion of available benefits and ignoring credit card signup bonuses.
As shown in the examples above, this translates to free or nearly free travel opportunities. Safe travels!
All credit card benefits and cost data in this post are believed to be accurate as of the time of writing. Always verify before taking action.
I initially was pretty adverse to paying annual fees on credit cards. If you would have asked me two years ago, would you pay $450 for a credit card? I would have said heck no! However, when the benefits (i.e. miles earned, travel credits, lounge access, free luggage) outweigh the costs, it’s an easier pill to swallow.
I was in the same boat. No way would I pay $450 for a credit card fee! Until last week, that is… The math won me over.
Yes, the math makes Chase Sapphire Reserve a real winner. I expect you’re aware, but forgot to mention in the article, this card gives you a second $300 travel credit starting with your January 2017 statement. It also gives you 100,000 miles after the initial spending requirement is met. I’m estimating the total payback for me will end up in the $2,500 range, less the $450 fee.
Yes, the signup bonus and calendar year $300 travel credit make it a clear choice. But even without them it is a great card.
Nicely written GCC! I’ve often wondered if some of those cards were worth it after the annual fee. You answered the question very well!
My question is: Does it make more sense to keep harvesting sign-up rewards or is there a card to keep like the Chase Sapphire, that makes it not worth the trouble?
My guess is that the sign-up rewards are worth it.
The sign up bonuses are always going to be the best ROI
I also hate fees, but I happily pay a $75 annual fee for the AmEx Blue Cash Preferred card. Upgrading from the no-fee “Everyday” card doubles the cash back at grocery stores from 3% to 6%, among other things, so it easily pays for itself.
It’s easy to object to fees on principle, but when logic says it’s a good deal, you’ve got to pay them.
6% cash back on groceries is a sweet deal, and an extra good reason to eat well at home.
Just don’t forget to re-run the numbers periodically. For me, with a looming $95 annual fee coming up, I pulled my annual grocery and gas spend from Mint and saw that with current levels of spend, I’m better off downgrading to the plain, no-fee Everyday card for grocery spend.
If we project a grocery spend shortfall, we will buy the lowest cost generic spend gift cards to max out the 6%. My wife and I each have our own account so we get at least $720 cash back each year ($6K + $6K at 6%).
Do you spend $12k on gas and groceries?
Chase Sapphire Reserve also reimburses for Global Entry, which includes TSA Pre as well. Much more valuable for international travel.
Preach it. I love traveling on miles and some cards give you lounge access which I wouldn’t need, but hey if it’s free I’ll take it. As for Costco in Taiwan, their two level system was different, but pretty cool.
Our one and only Priority Pass arrived in our mailbox today. Winnie will love relaxing in the lounge while Jr and I slum it at the gate :p
The magnetic cart escalators at Costco Taipei are the coolest feature.
According to this all travelers accompanying Priority Pass holder can enter the lounge free as well: http://onemileatatime.boardingarea.com/2016/09/05/sapphire-reserve-lounge-benefit/
I just read the welcome letter that came with the card, and it does say “you and your accompanying guests.” Awesome! Thanks Tarzog
Great, I love credit card hacking. Or any finance hacking.
Right now we have a (no-fee) Priceline Visa Rewards card that accumulates 2 points per dollar spent. If we redeem the points on Priceline name your own price bookings (which is what we use exclusively for domestic travel) then you get another boost factor of 1.5, so 3% rewards, instead of 2% cash back. Someone once did the exact artithmetic and factored in the points earned for the booking itself and concluded that this card earns you 3.33%. No annual fee. But unfortunately, this rewards program is no longer available to new customers. Existing customers are grandfathered in.
So, I’d have a high threshold for getting a card with an annual fee. The card not only has to pay me back the fee in rewards, but pay back in excess of the 3.33% I already earn for free. For example, if the Chase card pays back 4.5% rewards for travel and dining and I have to recover $150 p.a., we have to spend 150/(0.045-0.033)=$12,500 on travel and dining per year (rather than 150/0.045=$3,333). Currently we don’t. But in retirement we may, so I will definitely keep that card in mind. Thanks for the recommendation! Your endorsement means a lot!
See the IHG card example above. Guaranteed 585% ROI annually. Although 3.33% seems like a great 2nd place ;)
Also note that the Chase card give you 100,000 points after min spend, worth $1500+.
I just started getting into the credit card game in the past two years. I’ve always had credit cards since I was 18, but none with fees. Now I take advantage of the big sign up bonuses and go on free vacations. It’s a no-brainer. Can’t wait until I get my 100,000 Chase UR points on my Reserve :)
It is indeed a no-brainer. We ended up not using any of our Chase UR points while in Europe, so we’re sitting on over 200k of them now. Time to plan a trip!
I used to hate fees but now realized that fees are worth it if all the benefits outweigh the fees. For example if $120 annual fee can bring over $120 worth of benefits, I think that’s totally worth it.
I agree as long as it’s a benefit I would use anyway. Otherwise it’s like paying for an unnecessary purchase.
I recently called Chase to cancel a Sapphire Preferred card a few weeks before the first annual fee would kick in. The customer service rep offered me a $100 credit not to cancel, which bested the $95 annual fee. I’ll be keeping that one for another year, at least. Sapphire Reserve is next on my list of cards to get. I’ll head on over to MadCards to apply so one of us gets the referral fee.
And $5 profit too !
What is MadCards?
My bad. It’s Mad Travel Cards, the Mad Fientist’s card site. Works quite well. If you had an affiliate link, I would have used it, but I didn’t see one here.
The 100,000 bonus points should go a long way towards covering lodging costs over spring break. We just booked 4 round trip tickets to Paris with a 2-day stopover in Reykjavik. $417 each. Not a travel hack, just great fares on Icelandair from MSP.
Cheers!
-PoF
You can find links on this page and in the sidebar.
https://gocurrycracker.com/credit-card-rewards/
Well, my wife will need one eventually. I’ll check back with you then. We don’t “manufacture spending” so it will be a couple months before we’re ready for another one.
Best,
-PoF
One of my favorites it the Prestige 4th night free benefit, we have used this so many times! And I love Amex lounges although this may not be enough to keep it beyond the first year. They just added the extra points on airline flights but I don’t like their travel partners as much as the Chase Ultimate Rewards partners.
The 4th night free is definitely one of the best benefits out there. I agree about the travel partners though.
Last time I paid an annual fee was the US Air card (before merger with AA). $89 for a card that offered 50k points is a great deal. That buys around $900-1000 of flights, so about a 1000% return on investment. And we got a pair of those cards. :)
Otherwise I don’t pay annual fees on a routine basis. Though that IHG card sounds pretty sweet, and once I get it I might keep it. $49 for a free hotel night is a good deal even if you’re staying at a crappy hotel on the side of the interstate.
We’ll get W an IHG card at some point, so we’ll have two $49 nights per year. I meant to do that before our Europe trip, but time ran out on us
I’m surprised you aren’t interested in Global Entry (includes TSA pre and is also covered by most high annual fee CCs). Even if you only come back to the US a few times in the 5 year window it’s a nice time saver. Minor pain to sign up though, requiring a short in person interview at a CBP office, but they are at major airports.
I have the Chase United Mileage Plus Club Card. It’s annual fee is $450. When I signed up earlier this year they rebated $100 with your fist purchase and I got a 50k mile sign-up bonus. At 1.5 cents per mile the 50k points are worth $750.
For me the true worth of the card is the included United Club membership which ordinarily costs $550 per year. Entry into the clubs has become pretty easy, and some of the clubs have become crowded. But United seems to be working to expand their capacity. A comfy chair, a quiet space, a drink and a snack, even a shower in some Clubs, can be a welcome respite in a long day of travel. And the United Club has reciprocal privileges with other airlines’ clubs.
Oh, and the reason I replied to your post is that you can use United mileage points to buy Global Entry. I agree that Global entry is worth the time, hassle and (if necessary) money to sign up. Do know, though, that not all airlines participate in TSA PreCheck. But if your airline does, for me, not having to take off my shoes is worth the price! 8-)
I wouldn’t use United miles to get Global Entry because the valuation is too low (I knew you could use them for TSA Pre, I wasn’t aware you could for Global Entry.)
We went through about 20 countries in the last year and a half. Only a small fraction would have been helped by global entry. We probably spent a total of only one hour in customs / immigration. Faster entry would just have us wait longer for our baggage.
Someday if we are in one place for long enough where we can do the interview and it is basically free, I would do it. But I wouldn’t pay for it, so the value to me is zero.
But really I’d probably get Nexus, which is only $50 and comes with Global Entry and TSA Pre.
Nexus is also free for kids under 18, saving you an extra $100 over Global Entry.
I also pay a fee for the AmEx Blue Cash Preferred. It is used almost entirely for grocery purchases, which we get 6% back on, so it is well worth it. My other two cards have no annual fees, but one gives me 6% back on gas purchases, and the other 5% back on anything Harley Davidson related from the first $1. With these three I pretty effectively cover myself with 5-6% back, and fortunately only have to pay a fee on one.
How much do you spend on Harley stuff per year? I was an Intern at HD in college and used the employee discount a lot for T-shirts
Good to know about the strategy to not close the oldest card first. Didn’t know about that little gem of information.
We unfortunately couldn’t snag the Chase Reserve card because of the 5/24 rule. We may try going directly into a Chase branch to get approved as we read about others having success with that route. Maybe you or your readers have heard of that tactic working (or not)?
I couldn’t get the Reserve card due to 5/24 also. But Winnie could.
I think the only way a branch can help you is if you are Chase Private Client (min $250k.)
A couple people on Twitter confirmed they were more than 5/24 but asked branch manager if they were pre-approved and were able to get the Reserve.
We pay the fee on our Chase Ink and our Chase Sapphire Preferred cards each year. For that $190 we usually get around 10 flights each year. People are too quick to “generalize” things like – don’t pay fees. It’s definitely all about the math (and watching things like your credit score too!)
Do you spend more than $50k/year on the 5% categories for the Chase Ink Biz card? If not, you can downgrade to the Ink Cash. It has the same 5% back but no annual fee, but only on first 25k vs the Ink’s 50k. Might save you $95/yr
I just saw that on your blog post today. We don’t spend more than $50K. I need to read your post again to see how to convert those points though to miles, etc. Time for some more research…
As long as you have the Chase Sapphire Preferred or Reserve card, you can transfer points from a Chase Freedom or Chase Ink Cash card to the Ultimate Rewards account. These can then be transferred to numerous airlines or used to purchase flights via the UR portal at a 25-50% valuation bonus.
Thanks for that information! He doesn’t have either of those but did get two Southwest cards last December. We’re probably good for him to apply for one of the Chase Sapphires in Dec/Jan so he can avoid the Ink fee in Feb. of 17′ If we get this to work – I totally owe you a beer :)
Commonwealth Bank of Australia Master Card provides health care, repartiation and other travel insurance at no cost. Commercial alternative costs ~ $1,500 for one quarter. Health insurance worth ~ $750 per quarter can be suspended while out of country. Fee ~$250 per year. Quarterly yield = ($1,500 + $750) / $250 = 900% No longer a requirement to purchase travel tickets under same credit card account.
Sounds like a great card!
What makes the travel insurance so expensive? I was paying closer to $60/month for Europe travel.
Aside from marketing costs the main cost of the commercially offered travel insurance relates to unlimited emergency overseas medical assistance & hospital and repatriation expenses then to $A 2,500,000 personal liability insurance. The cover for cancellations, lost personal effects, etc is a relatively insignificant cost / benefit.
That the cover is provided “free” by CBA / Alliance may indicate that the marketing costs are the principal cost of other travel insurance offerings. Somewhat like non-resident hire car insurance costs.
https://www.commbank.com.au/personal/insurance/travel-insurance/travel-insurance-included.html
When calling to close an account to avoid the annual fee, I would also ask, as a last resort, to move the credit to an existing card if I have another credit card with the same bank. That way you still keep the same amount of credit available for credit score computing purpose. If that’s not an option I don’t let that stop me from closing them.
I also don’t worry about credit score since we don’t need credit or loans and banks only lend to people who don’t really need the money. Besides, we haven’t our credit score being impacted to a point that matters in our finances. We do keep the two oldest cards in our accounts open. Great post!
I don’t pay any fees on a Fidelity Rewards card I use, but in the future I do want to try travel hacking, which would actually include those fees. I am not too worried about those fees if/when we get to the point of hacking.
Jeremy do you do any manufactured spending?
I do not.
Don’t forget that you can also try to “product change” an annual fee card to a no-annual-fee card, rather than close it. Ex: Chase Sapphire Preferred to Chase Freedom (even if you already have a Freedom card!). YMMV with the customer rep, so you may have to HUCA a couple times.
However, the benefit is that there’s no change to your available credit or average age of credit.
I’ve enjoyed my share of cards – but have not dug into how they benefit the issuers.
Do the rewards come from a marketing budget, and/or are our purchases and info being sold? Or something more nefarious?
Most (all?) businesses have CAC (Customer Acquisition Cost.) The signup bonuses are just part of the CAC for the credit card business.
I think about 50% of revenue from the industry comes from transaction fees (up to 3%) and the rest comes from interest charges.
GCC,
Can you explain how the Alaskan Airlines companion ticket works and when it would be worth it to use it? Unfortunately Alaskan is mostly on the West Cost, but we’ve applied for the cards in order to diversify American FF (we have AA, Avios, and no on Alaskan). Too bad we reside in the monopolistic city of Charlotte, so not much competition when/if we need to buy regular tickets when awards are bad. In such cases I wish we were closer to DC.
We have two IHG and one Marriott CC’s. I might pay an AF of $85 on Marriott for one year or two to get a free night as we plan to go to NYC. After that it’s probably not worth to keep it if not going to a large city. It’s easier to find a Super 8 with some crappy but edible breakfast on the way to a national park and avoid deviation to a city to find a Marriott type hotel.
What I’m more curious is to understand Citi’s new rules. We cancelled AA Gold (25K AA points), Patinum, and Business AA CC’s (both 50K AA points) in September. It looks like that we can apply for a new AA card (if bonuses are still offered then) after 2 years but it’s better to select Platinum only for 50k AA bonus. If I selected Gold on say 9/15/18, I wouldn’t qualify for the bonus on the Platinum for the minimum of 2 years if I keep the card or almost 3 years if I cancel that card. Did I understand it correctly? if so, that travel hacking is definitely more challenging for people without a business. You cannot pretend you have a business on Chase or AmEx business CC applications.
BTW, if you, Jeremy, don’t do manufactured spending how do manage to fill up the limits of spending when your expenses are very low? I’m guessing you use somebody’s address in the USA, if you reside in Taiwan but keep applying for the US CC’s…?
One last question, when you traveled in Europe did you buy a medical emergency/evacuation insurance? If so, what company and how did you deal with the the most usual restriction of 45-day limit? I don’t know if insurance companies allow you to buy a next batch of evacuation insurance when you’re already traveling (is it in the find print that it must be purchased BEFORE the trip?).
Thanks
Lots of questions. Let’s see if I can answer all of them.
The Alaska companion pass gives you a second ticket on the same itinerary for about $100 + taxes. We used one of these years ago for a trip to Hawaii. For more expensive flights this helps get close to half price.
I don’t know anything about Citi’s rules, but you don’t need a Business per se to apply for business credit cards. You can apply for an EIN and go from there for any side hustle. It doesn’t even need to make money. Need a side hustle? You can start a blog for just a few dollars per month. I have plans to write a post about this at some point.
I’ll also write a post about meeting min spends. Suffice to say our expenses aren’t that low and we try to do all of our spending on credit cards. See this post about our mail solution.
And finally, I primarily use World Nomads for travel insurance. I’ve had policies for as long as 6 months, and you can book at any time, even after you’ve started a trip. You can also extend if you want to keep traveling.
World Nomads quote: 3 months, 2 seniors: Aus –> NZ = $A 756.00; Aus –> Vietnam $A 778.00; Aus –> USA = $A 1,155.00. Equivalent insurance is “free” with my CBA MasterCard account.
The card provides insurance for more than one person?
“Our insurance covers more than you – your spouse or partner and up to 10 dependent children travelling with you are also covered.”
https://www.commbank.com.au/personal/insurance/travel-insurance/travel-insurance-included.html
That is a really nice card!
I spent some time in the Escape Lounge in MSP courtesy of Chase. Even though I, like you, would never pay for this service the value is more than zero because you get free food and drinks. I would have spent $10 on lunch and at least $2 on the bottle of water I grabbed on the way out the door.
I still wouldn’t pay for it, so the value to me is zero. That is different from saying that it may reduce future expenses.
In your own analysis of whether a membership fee is worth it or not, this would be a fine thing to include if you know you are going to use it. We always carry water bottles and just fill them up in the public drinking fountain, so we wouldn’t be paying $2 for water. For example.