I was recently reading a blog post by frequentmiler (link here) that got me thinking about how I look at annual fees and credits or perks that some cards have. So, I thought I’d break it down here for you.
Annual fees are an interesting beast. It’s quite common for those just getting into the points and miles game to avoid annual fees at all costs. After all, most of us were taught that credit cards were mostly bad, and that annual fees were even worse. However, once we start getting hooked on using points to travel, annual fees start to become less important since you can get so much value out of large welcome bonuses only available on cards with annual fees. In fact, it could easily get to the point where you aren’t even paying attention to the annual fees and end up spending too much on them. With all of the ultra premium credit cards out there that have tons of perks included after paying the annual fee, the money we spend on having credit cards with points could quickly get out of hand. This can be one of the big dangers of using credit cards for points and miles.
So, how do I look at annual fees and keep myself from spending too much?
The first thing I do, is look at my finances and determine how much I’m willing to spend on annual fees each year. This limit is determined by the amount of income and other expenses I have each year. If you don’t have some sort of budget or spending plan to keep you on track for your goals, do that now. I can not stress the importance of knowing where your money goes. Specifically, plan out your needs (food, housing, transportation, etc.) that you can not avoid, investing (enough to get you to your retirement goals), saving for short term goals, and some money for things you enjoy (such as travel).
Within these parameters, I set aside some amount each month that will cover the annual fees for the cards I have/open each year. For example, you could save $50 a month, which allows for $600 in annual fees each year between all of your cards. Theoretically, that means you could open 6 cards a year that have an annual fee of $100 or less. Or, you could open a couple of cards with higher annual fees that may have perks you are looking for.
Since credit cards often have perks/credits that can be taken advantage of, I like to also look at the $600 for annual fees as an annual fund rather than a $50 monthly expense. You could also think of it as a bucket that you take out/add to each month. If you open a card, or reach a full year where an annual fee comes due, you’ll take the corresponding amount out of your “bucket”. Each month, you’ll keep adding $50 (for this example) for future cards you are wanting to open. If you take advantage of a credit, you could also add the money received from those credits to your bucket as well, increasing the amount of money you have for future cards.
To simplify this, let’s look at a couple of cashback card and how you could value the cards considering the annual fee and the welcome bonuses.
For this example, I’m going to compare two Bank of America Credit Cards: The BofA Preimum Rewards card and the BofA Unlimited Cash Rewards Card. The Premium Rewards card has a $95 annual fee with a welcome bonus (at time of writing) of 60,000 points ($600) after $4,000 spent in 90 days. The Unlimited Cash Rewards Card has a welcome bonus of $200 after $1,000 spent in 90 days and no annual fee. The points for both cards can be redeemed as a statement credit, or a deposit to a BofA account. The Bank of America Premium Rewards card also has a $100 Airline incidental fees credit per calendar year, and a $100 TSA Precheck/Global Entry that can be used once every four years.
Assuming you can meet the minimum spend requirements for both of these cards, how would that affect your $600 annual fee budget for the year? Since we are comparing the two cards, we’ll assume you spend $4,000 using the base rewards earning rate (1.5% for both cards), since that is the highest minimum spending requirement between the two cards.
First Year
BofA Unlimited Cash Reward Card
Let’s start with the no annual fee card. Since you won’t be paying an annual fee, you would still have $600 in the annual fee budget. You’d also have $200 from the welcome bonus and $60 from spending $4,000 on the card. That $260 could be spent for whatever you want, including putting extra money towards annual fees for other cards, travel, or another savings goal. So, you’d have $600 for annual fees and $260 for travel.
BofA Premium Rewards Card
Meeting the spending requirement for the welcome bonus would mean you have $660 worth of points ($600 from the welcome bonus, $60 from the $4,000 spent to get there). Since there is a $95 annual fee, that will need to be subtracted from the $600 annual fee budget leaving you with $505 for annual fees for the year and $660 in rewards to do with as you please for a total of $1,165. Since we’re dealing with cash back cards, you could pull $95 of the cash back earned back to your annual fee fund, meaning, you’d have $600 for annual fees, and $565 for travel (or anything else). That is $305 more than getting the no annual fee card.
Are you beginning to see the power of using cards with annual fees? For the first year, you can often get a lot more value out of the card than you ever could with a no annual fee card just from the welcome bonus. Also, cards with annual fees often have some sort of perks as well, that may make them worth even more.
Credits
The Premium Rewards Card has two credits that should be accounted for as well when looking at the value of the card compared to the annual fee. These credits are $100 per calendar year in airline incidental fees, and $100 up to once every four years for TSA Precheck or Global Entry.
If you have travel planned during the year, the airline incidental credits often work for the taxes and fees or baggage fees that can not be paid for with points. This can be very useful in this game since these cash fees can be a significant cost depending on the airline and the destination/origin. Keep in mind that not every airline’s fees may work for Bank of America’s airline incidental credit. I would recommend checking the internet for things that have worked for other people to give yourself a better chance of getting the credit.
These credits are where things can start to get a bit tricky. My rule of thumb is to value credits such as these at the amount that I would have spent without the card. For example, if I was already planning to spend $100 in taxes and fees and baggage costs for a flight, I might value the $100 airline incidentals credit at $100, because it was $100 I was already planning on spending, and now I’m getting it back.
If you are going out of your way to spend a credit, I wouldn’t count it as a full credit. You’re still getting value out of it, but you’re also going out of your way to use it, when you normally wouldn’t. For example, if you had never considered getting Global Entry, but decided to because of the credit, I wouldn’t view that credit as giving you money back. Rather, I would look at it as paying $95 (the annual fee of the card) to get Global Entry, which normally costs $100.
Let’s put this in context of a first-year value comparison between the two cards.
| Card | Cost of Annual Fee | Welcome Bonus | $4,000 Spend | Airline Credits | Global Entry/TSA PreCheck | Total Value |
|---|---|---|---|---|---|---|
| BofA Unlimited Cash Reward Card | $0 | $200 | $60 | $0 | $0 | $260 |
| BofA Premium Rewards Card | -$95 | $600 | $60 | $100 | $100 | $765 |
| BofA Premium Rewards Card (No Global Entry Value) | -$95 | $600 | $60 | $100 | $0 | $665 |
| BofA Premium Rewards Card (No Credits Value) | -$95 | $600 | $60 | $0 | $0 | $565 |
As you can see, the way you value the credits can change the value of the card for the first year. If you already have Global Entry, or wouldn’t normally pay for it, you would value the card less than someone who doesn’t have Global Entry, and was planning on paying out-of-pocket for it. Now, the next question becomes, how do these cards stack up after the first year?
Ongoing value
If you commonly spend $100 on things that can are considered airline incidental fees, then the BofA Premium Rewards Card starts to look pretty good. All of a sudden, this card starts to be a “free” card (after credits). However, if you don’t commonly spend $100 on airline incidental fees, this card wouldn’t be as attractive.
| Card | Cost of Annual Fee | Airline Credits | Global Entry/TSA PreCheck | Total Value |
|---|---|---|---|---|
| BofA Unlimited Cash Reward Card | $0 | $0 | $0 | $0 |
| BofA Premium Rewards Card (If you use Global Entry Credit that year) | -$95 | $100 | $100 | $105 |
| BofA Premium Rewards Card (No Global Entry Value) | -$95 | $100 | $0 | $5 |
| BofA Premium Rewards Card (No Credits Value) | -$95 | $0 | $0 | -$95 |
As you can see, the card very quickly becomes a liability if you are not making good use of the credits. Especially since you can only get the Global Entry Credit once every 4 years at most. Note that I did not include the rewards earned from purchases made with the card. Points earned from spend on the card each year would be added to your Total Value of the card, and could change whether or not the card is worth keeping for you.
Since this is a cash back example, the total value of the card can be used for anything. You could even put it into your annual fee fund to open up more options for future cards. Or, you could put the cash towards travel expenses that can not be paid for with points. The choice is yours, but with cards that do not earn cash back, it can get a bit more complicated.
Comparing Values of Points Cards
To use a personal example, we opened an American Express Gold Card under my wife’s name when the welcome bonus was 75,000 points and 20% back on dining for the first 12 months (issued as statement credits up to $250 total). We typically spend around $100 eating out to begin with (or $1,200 within 12 months). That meant we should get back $240 just on our typical dining spend for the first year, as long as we only used the Amex Gold Card for dining purchases.
On top of that, we planned a trip to Disney World that year. Since we’d be on vacation for a week, we were going to be spending a lot more money on dining this year, making it even easier to hit the maximum $250 from the 20% back on dining. This is a perfect example of using credits to offset the annual fee. Since we could easily spend enough to get $250 back on dining spend we had already planned for, this card was essentially free for the first year. That means 75,000 American Express Membership points without paying an annual fee. That’s huge!
Also, with the Amex Gold Card, there are also $10 monthly credits for dining a Amex’s partners and $10 in Uber Cash each month. We did not use those credits, as we don’t have any of the partner restaurants near where we live, and we don’t typically order delivery, so using the Uber Cash for Uber Eats or using GrubHub would have required changing our habits. Now, if we did change our habits and started ordering in at least some of the time, we could have gotten back even more than the $250 from the 20% back on dining. However, since there are usually delivery fees, tips, and increased prices using GrubHub or UberEats, we probably wouldn’t have valued the credit at the full $10.
To further complicate the math, you can also account for the points you get from the card, using their reasonable redemption value. You may find a card’s annual fee worth the points you can get from the welcome bonus, or ongoing spend on the card depending on the category.
For example, with the Amex Gold Card, I got 75,000 points from the welcome bonus as well as 4x points on dining and grocery purchases for ongoing spend. According to Frequent Miler, American Express points have a reasonable redemption value of 1.55 cents per point (cpp). So, the welcome bonus alone could be valued as $1,162.50 if redeemed at 1.55 cpp (which should be easy to do given the methodology Frequent Miler uses for their valuations). If you are pickier about your redemptions, you could possibly get even more value out of those points than just 1.55 cpp.
The welcome bonus alone, minus the annual fee (assuming no credits are taken advantage of), would make the card worth $912.50. With the 20% back on dining, if valued at full value, the card becomes worth $1,162.50 again. If you were able to take full advantage of the other monthly credits, and valued them at full value, that would bring the value of the card up another $240 to $1,402.5. That is a lot of value out of a single card.
Let’s also assume you use this card for grocery store (does not include most Walmarts) and dining purchases throughout the year. Just $500 per month in those categories on the card would be 24,000 points a year ($372 based on 1.55 cpp). That alone, could be worth the annual fee, if the annual fee doesn’t prevent you from getting other cards based on your budget.
| Scenario | Annual Fee | Welcome Bonus (75,000 points at 1.55 cpp) | $6,000 Minimum Spend (assuming 1%) | Spend on Card ($500/month in 4x categories) | 20% Back on Dining (over 12 months) | Monthly Uber Cash | Monthly Dining Credits | Total Value |
|---|---|---|---|---|---|---|---|---|
| Amex Gold Card (Full Value) | -$250 | $1,162.50 | $60 | $372 | $250 | $120 | $120 | $1,834.50 |
| Amex Gold Card (Ongoing w/credits) | -$250 | $0 | $0 | $372 | $0 | $120 | $120 | $362 |
| Amex Gold Card (Ongoing w/o credits) | -$250 | $0 | $0 | $372 | $0 | $0 | $0 | $122 |
One last thing to keep in mind is to not to get cards specifically for the perks, unless you are willing to pay the annual fee to get the perks. If you want lounge access, are you willing to spend the annual fee to get it? If a card costs $450, and you are only taking advantage of the lounge access, is the lounge access worth $450 to you? If you are able to get $300 in credits, that you are going to take full advantage of, are you willing to pay $150 for the lounge access? Also, do you have enough money in your annual fee fund to support the cards you want to keep? These are the things to consider when deciding if a card is worth the annual fee to you.
Hopefully, you now have an idea of how cards can be valued with their annual fees, and the pitfalls of getting too wrapped up in credits. As long as you get real value out of the credits based on your typical spending, or are willing to trade the annual fee of the card to get a specific perk, go for it. Otherwise, don’t overextend yourself and spend tons on annual fees for cards where you are not getting the value out of it.