It takes money to make money. The saying is thrown around in the investment world, normally referring to the need of initial funds and/or capital in order to capitalize on investment opportunities. While this anecdote is cliché, it proves to be true in practice.
The concept also applies to the world of credit cards, as it relates to credit cards and their annual fees. Many people want to earn points and miles in order to travel the world, yet shy away from the credit cards that will allow them to do so for fear of an annual fee… That sentiment is flawed! Don’t shy away… open your mind up to the thought of a credit card with an annual fee!
Credit card companies are willing to shovel tens of thousands of points, worth hundreds and thousands of dollars, so take advantage of it! Do NOT let $95 (or other annual fee amount) prevent you from your achieving your travel dreams!
An Annual Fee is a Good Thing:
An annual fee may be designed to offset some of the credit card company’s costs of the benefit they offer you, but what it means for you in the short term is higher sign-up bonuses – meaning more towards free travel!
For instance, take credit card issuer Chase and two of their offered cards – the Chase Sapphire Preferred card and the Chase Freedom card. Chase is willing to offer 50,000 Chase Ultimate Reward points when you apply for the Chase Sapphire Preferred card (annual fee of $95 per year, waived the first year) – an offer worth $625 by their own estimation (I estimate this bonus to be worth even more!)– and willing to offer just 10,000 Chase Ultimate Reward points when you apply for the no-annual fee Chase Freedom card – an offer worth $100. Both cards have great earning potential through bonus categories (CSP) and rotating 5% categories (Freedom), but let’s just focus on the value of the sign-up bonus vs. the annual fee:
But, before you start telling all your friends how generous Chase is; remember that they are in the business of making money…
While those 50,000 points make the Chase Sapphire Preferred more lucrative for ALL potential cardholders in the SHORT term, MANY people will not be able to reap enough value out of the Chase Sapphire Preferred year over year in the LONG term (i.e. more than 1 year) in order to justify the annual fee.
In the example I was using above, you’ll see that the annual fee on the Chase Sapphire Preferred is $95 due in your second year of card membership. This means that you can apply for the card, earn the sign-up bonus and redeem the sign-up bonus for free travel, all before that first $95 fee becomes due!
When the time comes that the annual fee costs more than the value of the benefits you receive (for me, this is typically after X number of years)… make a change – either move your credit line (if you have another card from that card issuer) and cancel, or downgrade your card to a no-annual fee option (like the Chase Freedom)!
Now that you have received some great value on the initial bonus, for the remaining months in your first year as a cardholder make sure to enjoy the variety of card benefits (trip delay insurance & primary rental car insurance, among others) and maximize points in the travel & dining bonus categories to earn points for free travel… and then determine if the card is worth the annual fee going forward! If all that is not worth $95 annually, then make a change (cancel or downgrade) before the start of the second year!
I estimate that 9 times out of 10 my credit card applications are for cards WITH annual fees, ranging from $69 to $450 per year ($450 is steep, but it can earn you Global Entry/TSA PreCheck, airport lounge access, and much more). They key is being able to leverage the initial sign-up bonuses and benefits in the short term, while knowing when to downgrade annual fee cards to no-annual fee options to avoid ongoing costs in the long term. I am more than willing to put up a little cash up front (i.e. a $95 annual fee) for the opportunity to earn large point quantities that I can turn into travel worth thousands of dollars!
Keep in mind that the difference in value between annual fee cards and no annual fee cards are not always this glaring (i.e. the difference in sign-up value between cards like the American Express Everyday and Everyday Preferred is much slimmer), so it is important to do always do your research to determine what is right for you and your lifestyle.
Disagree on my stance regarding annual fees? Have questions about how an annual fee card can work for you? Comment or send me an email at firstname.lastname@example.org and we can discuss further our philosophies!