How Do You Know If Your Credit Card Is Worth Its Fee?

According to research, approximately 32 percent of credit cards on the market have an annual fee. This means that while the vast majority of cards don’t have a fee, if you’re looking for a card with the best perks, you need to be prepared to pay an annual fee. However, how do you know if your credit card is worth its fee? Here we’ll look at how you can assess a card to determine if you should keep the account open and continue paying the annual fee.

Why Credit Card Issuers Charge Annual Fees:

Before we explore how to know if your credit card is worth its annual fee, it is important to understand why credit card issuers charge annual fees.

Credit card issuers often charge annual fees to offset the cost of offering various card features and benefits. It is easy to see that credit card companies would not be able to offer hundreds of travel credits each year, competitive rewards, and other perks for free. So, if you want to enjoy a luxury credit card or you prefer the facility to earn generous rewards, you should expect to pay a fee.

Understand Your Annual Fee:

The first step is to work out if your card is worth an annual fee is to understand just how much you’re paying each year. According to a 2018 research poll, over half the participants did not know how much their credit card annual fees were. You cannot possibly assess the value of your card if you don’t know what you’re paying.

Many people get a little confused because their card issuer waived the fee for the first year. This means that you will have had the card for a while before a fee arrives on your statement. The fee is usually billed in a lump payment on your card anniversary. So, you may need to check back on your statements or check your account paperwork to see what the annual fee is.

Do The Card Perks Have Value to You?

Next, you will need to think about whether you would actually value the card perks. If you don’t particularly travel, getting lots of travel perks will not be worth much to you. Your ideal card should have perks that represent value to you. This doesn’t necessarily mean a monetary value. For example, while you may not typically pay for lounge access or seat upgrades, if these come with your card, you may appreciate them.

Likewise, if the card offers additional rental car insurance, it can provide peace of mind if you use a rental a couple of times a year.

So, look at the full list of card perks to see if they appeal to you and you would benefit from them.

Would You Need to Change Your Lifestyle to Access Card Benefits?

While earning bonus points and accessing card perks are great, if you need to change your lifestyle to access these benefits, it is not the right card for you. This is most typical with welcome bonuses. Although the prospect of a very generous welcome bonus is appealing to many consumers, if the minimum spend requirement is too high, you will struggle to meet it and miss out on a bonus. In this scenario, you would be better off with a card that has a smaller welcome bonus and a more achievable spend requirement.

Instead of thinking about how much you’ll need to spend to receive a card perk, consider how quickly you can recoup the annual fee just with your typical spending habits and standard living expenses. For example, if you have a large family and typically spend a lot on groceries each month, your best card option would give you a higher rate of rewards for grocery purchases. With the rising cost of groceries, a Credit Cards for Groceries could be a great way to offset this, earning rewards without needing to make significant changes to your spending patterns.

Perk Value vs Annual Fee:

The final way to know if your credit card is worth its fee is to compare the value of all the card perks with the annual fee. Break it down to see if the annual fee feels worth it to you. For example, if your card has a $500 annual fee, you need to feel confident that all the card benefits you receive equal to or exceed $500.

For example, if you have a travel credit card such as the Chase Sapphire Reserve that offers $300 of travel credits, it is easy to see how it can help offset a $500 annual fee. When you factor in lounge access, car insurance, and other perks, the value of this card is obvious for regular travelers. However, sometimes whether the card perks outweigh the annual fee is a little more complicated and you’ll need to do a little math.

For example, if you have a cash back card that offers a percentage of your purchases as rewards, look at what you typically spend on groceries, restaurants, and gas station purchases. Then look at what percentage of cash back you could earn.

For example, if you earn 5% cash back on groceries and you typically spend $1000 a month, you’ll get $50 of cash back each month or $600 per year. This would easily offset a $500 annual fee alone. If another card offers 3% grocery cash back, it may seem like a worse offer as you'd only get $30 a month. However, if you’re only paying a $95 annual fee, you’ll actually have more rewards, $265 vs $100. So, if the basis of getting your card is purely for grocery shopping rewards, the lower annual fee card is actually a better deal for you.

Of course, you will need to look at more than one reward category, so take a little time to sit down with your budget and work out how much each card could offer you and whether the card is worth the fee for you.