Are Credit Card Annual Fees Worth It?

Scottrick here. I’d like to introduce you to the first of several guest posts by Travel Summary. Just as Amol (PointstoPointB) tested the waters in December and ultimately decided to post fulltime on Hack My Trip, I’ve given Travel Summary a similar option. For now he will continue writing his own blog, but I think it will be good to give him some extra exposure.

Why am I doing this? Blogging is a lot of work, and I’m not an expert on everything. It makes more sense to bring in regular contributors who can fill in those gaps and save me the effort. I still plan to write the majority of the content on this site, but I hope that I can spend more time creating better material if I don’t have to worry about writing something new every day. It gives me more time to answer emails, do research, and work on improving the reader experience. With that said, let’s see what Travel Summary has to teach us!

A big part of the travel game revolves around signing up for credit cards that offer large miles/points bonuses. It’s by far the easiest way to accrue large amounts of points and miles quickly and easily, especially when compared against utilizing prepaid cards to earn miles, but it’s important to not forget about the fees that are being incurred as a result of signing up for some of these credit cards.

So is it worth it? “Worth” is subjective and difficult to measure, but what we can do is analyze the costs of popular cards to compare and better enable each of us to decide for ourselves. Everyone has a different number and mix of credit cards in their wallet, but there are some that are discussed a lot more often than others in the points world, particularly among those that travel frequently. If someone were to start from scratch and sign up for a theoretical “top 10″ cards, how much would they pay in annual fees and how many points/miles would they accrue?

There will clearly be some disagreements here as to whether my top 10 cards are a good representation of common credit cards, but in my mind they are. To use a middle ground, I’ve valued British Airways Avios and Amex Membership Rewards, Chase Ultimate Rewards, American Airlines points at 2 cents apiece, while SPG points are valued at 2.5 cents each. A free night from Hilton and Hyatt are worth $500 each and one from Priority Club is $400. By most valuations, these are fair numbers to use.

Let’s see what our cost/benefit ratio is for the first year based on the bonuses alone (I’m ignoring other card benefits for simplicity).

A theoretical “top 10″ cards and the value of their respective bonuses.

As you can clearly see, you’re literally getting thousands of dollars worth of value from these credit cards based on the bonuses. Even if you think my estimates are grossly overstated, you’re still going to come out on top by a huge margin by reducing my valuation. This is why you often read that credit card bonuses are all you really need to travel cheap and often. Someone can easily redeem these bonuses for 2 really grand vacations if planned properly.

But remember – they weren’t free vacations. They would be damn cheap vacations, particularly for the types of accommodations you could and should redeem for, but you still paid $715 out of pocket. You’d have plenty of points/miles for flights or hotel redemptions if you signed up for just the $0 fee cards, but you’d also be leaving a lot of value on the table (notice all 4 of the fee cards have bonuses valued at $1K).

That was a relatively easy exercise. The hard part comes when year 2 arrives and you need to decide whether to keep the card or not. The cards I listed above are cards that come with a lot of travel benefits aside from the bonuses. The hotel cards, for example, come with a free night or status, or both. The Amex Platinum card provides lounge access among many other benefits, and the other cards are all valuable due to bonus point categories or other perks. My point: these cards might be hard to cancel due to the benefits of the card, which is exactly what the credit card companies want.

Let’s compare the costs/benefits of these cards if you were to hold on to them for another year.

Fees in the second year add up quick!

Suddenly the out-of-pocket cost grows to $1,279, and there are no big bonuses to show for it. That doesn’t mean you’re not getting any additional value from the cards, but you don’t get many “real” rewards. The free night from Hyatt is restricted to only category 1-4 hotels, but you can still squeeze out good value depending on when the room is booked (New Year’s Eve, anyone?). In my opinion, $200 would be a fair valuation for that free night. The Priority Club one can be really valuable if used at an InterContinental hotel, so I value that free night a little higher at $300.

The Amex Platinum card is a tougher card to value because it depends on how and how often you travel. I know a lot of people say that the $200 airline incidentals credit brings the annual fee down to $250, but the way I see it is that you’ve paid $450 regardless. Still, between the airline credit, lounge access, SPG Gold status, rental car elite status, Fine Hotels and Resorts program, and other benefits, it could potentially be worth a lot. I personally value the card at $300.

The other cards provide what I’ll call peripheral benefits. Everyone will value peripheral benefits differently, particularly for the Amex Platinum card. If you travel only once or twice a year, for example, you probably don’t even need a premium card like the Platinum card. You can see my valuations in the table above.

Frequent travelers and big spenders, on the other hand, can easily justify the fees based on the points or extra benefits they earn (such as another “free” Hilton night after $10K spend on the Reserve card). But again, I caution against the phrase “free night” because you’re actually paying $95 for it and other benefits like Gold status.

I realize that a lot of the valuations I made above are subjective, but that’s part of the point I’m trying to make. Instead of using the valuations that you’ve read here or elsewhere, everyone should make their own calculations based on their personal travel style and frequency. The whole point of this game is to save money, so make sure these cards will help you meet that goal!

If you couldn’t tell, this post was written to caution you regarding annual fees. It’s easy to get caught up in App-O-Ramas and look at the huge number of points and benefits you’re banking while ignoring the fees you might be paying. We see taglines like “travel free” or “travel big and spend little” and the like on various blogs, but the advice given doesn’t always teach you to travel for free. Instead, they talk about prepaid card schemes that actually cost hundreds of dollars before you can earn enough for a proper trip, or they suggest credit cards that have large annual fees that also add up. Combine prepaid card purchases with annual fees and you can easily spend a few thousands of dollars and not even realize it as it happens!

Oh, and don’t forget taxes and fees on those airfare awards also. They could be as little as $5 or as much as $1,000 depending on your route and the types of points you use. Just one more thing to keep in mind.

My best advice is for you to keep a spreadsheet of your credit cards, their fees, and the dates when the annual fee will hit. When you see the numbers in front of you it might help you decide whether or not you think it’s worth it to keep the card. If you have a specific vacation in mind that you want to redeem for, calculate the taxes and fees before you get the card to make sure you’re willing to pay it. In short, plan ahead!

As a final note, I want to mention that this all assumes you’re paying off all your balances in full every month. Credit card debt is one of the most expensive types of debt, and the cost of carrying a balance will more than negate the cost of your bonuses. I strongly recommend you pay off your current cards and learn to manage your finances before you decide to sign up for new credit cards.