A $500 annual fee takes $100,000 of spending to earn back, not $25,000
· 4 min read
A card with an annual fee pays for itself only if its rewards beat what a free card would have paid by more than the fee. Take a $500 fee and a card that pays back 2%. Against a free card paying 1.5%, the fee is covered at $100,000 of spending a year. That is $8,333 a month.
The comparison that matters
It is tempting to divide the fee by the reward rate: $500 at 2% is $25,000 of spending. That is the figure against a card that pays nothing back at all. Most people’s real alternative is a card with no fee that pays something.
Against the free card, the fee card earns half a cent more per dollar. $500 divided by half a cent is $100,000.
The fee and both reward rates are examples, not any card’s terms. The annual fee calculator works it out for the figures on an offer you are looking at.
Credits change the sum, if you would have spent the money anyway
Cards with large fees often come with credits toward travel, dining or subscriptions. A credit is worth its face value only if it replaces something you were already going to buy. Count $200 of credits you would really use and the fee left to cover is $300, which takes $60,000 of spending at the same half a cent.
A credit toward something you would not otherwise buy is not worth its face value to you. How much less is your own call, and it is the number that most often makes these sums come out wrong.
A smaller fee, the same method
With a $95 fee and the same half a cent of extra rewards, the fee is covered at $19,000 a year. Someone putting $30,000 a year on the card would be $55 ahead of the free card.
What this leaves out
- Interest. All of this assumes the balance is paid in full every month. If it is not, the interest is usually many times larger than any reward.
- What points are really worth. A point is worth what you redeem it for. Turning that into a percentage is your own estimate.
- Sign-up bonuses. They are paid once, so they say nothing about whether the fee is covered in the second year.
- Benefits with no price. Insurance cover, lounge access and the like have a value only you can put a figure on.
An estimate from example figures, not financial advice.
