Guest blog: Think twice before getting a rewards credit card with an annual fee

When it comes to credit cards with annual fees, there are two mindsets: shocked and appalled at the idea of paying for a credit card on one side, and certain of the value such credit cards provide on the other.

That latter group has grown significantly in recent years, especially after the hysteria around the Chase Sapphire Reserve’s release. It’s not often that people are excited to get a credit card with a $450 annual fee.

The allure of travel rewards cards (and the jetsetter lifestyle) is understandable. But for the average consumer, a rewards card with an annual fee is an unnecessary expense.

Calculating your return on a credit card

One popular way to decide if a credit card is worth the annual fee involves comparing that fee to the projected return. Let’s say that, based on your average expenses, you see yourself earning 50,000 points per year on a card with a $95 annual fee. At a minimum, those points are worth $500 cashback, and you come out $405 ahead.

The problem is that it’s not just a matter of how much you could make with the rewards card. You must also consider if you can make the same return or more on a cash-back card with no annual fee.

Here are the factors to look at when deciding whether a rewards or cash-back card will provide the best value:

The real redemption value of your points

The argument for rewards cards is that you can do more with your points. When you have a cash-back card, you’re stuck at whatever percentage it earns you. With a rewards card, the only limit is the deals you find.

I often see travel bloggers score 3, 5 or even over 10 cents per point when it comes to redemption value, blowing any cash-back card out of the water. The more luxurious the travel you’re booking, the farther your points will go.

If you want to book a first-class international ticket to Europe, your points/miles could score you an excellent deal, like a $10,000 ticket for 100,000 or fewer miles.

What if you’re not after those luxurious trips, though? Then what you could get for your points means nothing; what’s important is what you will get for them. If you’re traveling domestic routes in economy class, the standard rate for an award ticket is 25,000 miles plus possible fees. Those same tickets tend to cost about $250 to $300 when you pay cash. You’re getting around 1 cent per point, or perhaps slightly more for select flights.

Here’s an example with United Airlines – I shopped for the same route (LAX to the New York area) in cash and miles.

This pricing was average compared to flights on other dates.

With the fees, you barely get more than 1 cent per point even on that 12.5k Saver Award Ticket.

Will you earn more points than cash back?

One of the selling points of reward cards is the spending categories where you earn bonus points. For example, Chase offers 3x points on travel with two of its most popular cards, the Sapphire Reserve and the Ink Business Preferred.

Even though these are good offers, there are also cash-back cards that earn more than the standard 1 percent return. Here are a few notable examples:

  • Citi Double Cash: 1 percent cash back on purchases and another 1 percent for payments on purchases, effectively earning 2 percent cash back on all your spending
  • Chase Ink Business Cash: 5 percent cash back on spending at office supply stores and on cable, internet and phone services; 2 percent cashback on spending at gas stations and restaurants
  • American Express Blue Cash Everyday: 3 percent cash back at U.S. supermarkets (on up to $6,000 per year in purchases, then 1%), 2 percent cash back at U.S. gas stations and department stores. American Express is a CreditCardForum advertising partner.

Maximizing your value on credit cards

None of this is to suggest that you should avoid annual-fee rewards cards entirely (you’d need to pry my Sapphire Reserve from my cold, dead hands). Just make sure to review how much value a card offers you before you apply and each time the annual fee is due.

If you’re booking multiple domestic trips or at least one international trip every year, you’ll likely get the most out of a travel rewards card. For everyone else, it’s a better idea to get multiple cashback cards with no annual fee and bonus earnings across a diverse range of spending categories. You’ll earn a consistent return on all your spending, and you won’t spend hours searching for the top rewards-travel deals.

Author bio

Lyle Daly is a personal finance writer focusing on credit cards, money management and rewards programs. His other interests include creative writing, martial arts and shooting. Lyle is based in Los Angeles with his cat, Max Action Daly.

 
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