Pay For Rewards?
by Jason SteeleA reader asks:
“Is it ever an advantage to pay an annual fee for a card that pays increased rewards?”
My Answer
A qualified yes. Many reward cards do have an annual fee, while some do not. I currently hold a Capitol One Visa that has no annual fee. I use it whenever a merchant does not accept my Starwood American Express, which does have an annual fee. When I use it, I receive 1% cash back. I also use my Capitol One card whenever I travel outside of the United States, as it is one of the few cards without an egregious foreign transaction fee. (In comparison, all Amex cards have a 2.7% FTF that you can think of as a negative reward card whenever you use it for non-dollar transactions.)
It is worth paying the annual fee on my Starwood Amex because it’s rewards are so valuable. I can get an average of 4 cents in value from each Starpoint I receive. That means if I charge $30,000 a year on my Starwood Amex, I am receiving $1,200 a year in value when I redeem the award. If I were to put all my spending on my Capitol One, I would only receive $300 in cash back. The $900 difference easily makes up for the $45 annual fee on my Starwood Amex.
There are other factors to consider when you pay an annual fee. First, most cards will waive the annual fee the first year, so it is easy to try the card out and just cancel it when the fee is due after one year. Another strategy is to simply call the company when the fee is due and ask them to waive it. Sometimes they do, sometimes they don’t, but occasionally they might just offer you some extra points or miles. It never hurts to ask.
The less you spend, the fewer rewards you will get, so paying an annual fee is probably not a good idea for people who spend very little on a particular card. The key is to weigh the benefits of the expected rewards against the annual fee, and then compare it with cards that are available that do not have an annual fee. It is not a simple equation, but it is worth doing in the long run.