The annual fee you pay for some credit cards can buy you many different benefits. If you have the money, it could get you a dedicated “relationship manager”, lifestyle management, and a card that’s trimmed in gold and a real diamond.

Most people’s lifestyles can’t support those kinds of fees but even if the fee is only measured in tens or hundreds of dollars, does it make sense to pay it? After all, there are lots of no-fee cards to choose from.

Let’s look at why you might need to pay an annual credit card fee and whether it’s worth the money.

What is an Annual Fee?

Some credit cards charge a fee for the card every year. These fees are sometimes waived for the first year to entice people to sign up but whenever the fee kicks in, it gets added to your bill like any other charge you put on the card.

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These fees typically range anywhere from $20 to several hundred dollars. There are some ultra-high-end cards, like the American Express Black Card, that have much higher fees and may even require you to have millions of dollars deposited in the bank, but those are the domain of the ultra-rich.

For the average credit card user, $400-$500 is the upper end of the range. There are quite a few different rewards and perks that you may get in return for paying the fee.

Points and Rewards

The most common type of credit card with an annual fee is points or rewards cards. With these cards, you earn points for every dollar you spend on the card.

The points can be redeemed for things like merchandise, airline tickets, hotel stays, and various other rewards. In many cases, these are “branded” cards that earn points that can only be redeemed with a certain brand or merchant.

You may earn points on purchases from anywhere but they can only be redeemed at a limited number of places. These cards often give you more points on purchases made from that same brand than from other companies.

For example, you might earn one point for every dollar you charge on the card but three points for every dollar you charge from that same merchant.

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Cash Back

Cash back cards let you earn cash rebates instead of points. You typically get a percentage of everything you charge to the card credited back to you. Much like points cards, you often get a higher cash back credit when you buy from the same company whose name is on the card.

The cash back credit can come in one of two forms:

• A rebate check you can cash and spend anywhere
• A credit on your bill that either reduces your balance or creates a credit balance on the card that you can spend

Bill credits are more common than rebate checks but they’re both available if you do some digging to find the best deals.

Perks

Many credit cards that charge a yearly fee include extra perks beyond the rewards or cash back aspect. Some offer concierge service for booking hotels, rental cars, and other travel items. Others let you “jump the line” for buying event tickets or even get VIP entrance at the events themselves.

These perks are usually not the only benefit you get. They’re usually extra bonuses alongside the main rewards or cash back incentives. The perks can be worth as much or more than the main rewards if you choose your card wisely though.

Insurance and Purchase Protection

Another bonus perk on many cards with a fee is extra insurance and purchase protection. Travel cards often include free travel insurance for the card holder and sometimes for immediate family members. You may also get life and/or disability insurance that would make your payments or even pay off the balance on the card completely in the case of injury or death.

Some cards include extended warranties for anything paid for with the card. This can be a valuable extra if you use your card to buy things like a laptop computer or smartphone.

The repair costs on those types of products can be almost as much as it cost to buy it in the first place. In fact, sometimes you could end up replacing it rather than fixing it. Credit cards with an extended warranty feature can end up saving you a lot of money in those cases.

No Credit History and Low Credit Score Cards

Another common type of card that may have a fee attached is the “credit builder” card. These cards are meant for people who either have no credit history at all or a low credit score that won’t qualify them for most cards.

It’s a bit of a paradox that credit is usually most available to the people who need it the least. People who don’t have a lot of extra money and may have a bit of a checkered credit history often find it tough to qualify for a credit card.

Credit builder cards are designed for those people. In some cases, it will be a secured card, meaning you have to send a certain amount of money to the credit card company for them to hold as a deposit against the charges you put on the card. If you don’t pay the card balance at any point, they have the security deposit to apply to the balance.

Other times it will be an unsecured card that doesn’t require a deposit. Fees are more common with unsecured cards but plenty of secured cards have them as well.

How to Decide if the Fee is Worth It

Whatever type of card you’re in the market for, you’ll have options for cards with fees and cards without. But the fact that you can get a card that doesn’t charge a fee doesn’t always mean that it’s the better deal.

Whether or not to pay a fee comes down to one thing – are the rewards and other perks you’ll get worth more than what you pay annually to have the card?

Before you sign up for a card that has a fee, look at the rewards to estimate what kind of value you should expect to get over the year. Cash back cards are easiest to estimate. All you have to do is work backward from the fee.

For example, if you pay $100 a year to have the card and you get a 1 percent cash-back bonus, you would have to spend $10,000 over the year to break even. If you can expect to spend that much or more on the card, it’s worth the fee.

Non-cash rewards are harder to estimate but you can do the same kind of calculation. Figure out what the rewards are worth if you bought them outright and then work backward from the fee to see how much you need to spend every year to break even.

Types of Credit Cards to Consider

There are several types of cards to consider when you’re looking at cards with fees:

• Cash-back cards
• Travel rewards cards
• Merchant-specific rewards cards
• Credit builder cards

We’ve already discussed the cash-back and credit builder options. Choosing between different travel and/or merchant rewards cards comes down to a couple of things.

The most important consideration is whether you’ll use the rewards the card offers. There’s no point signing up for a travel card if you never leave your hometown.

The exception to that rule is if the card offers other perks that are valuable enough for you to make the fee worthwhile. For example, if a travel card includes perks that you already pay for separately, it might be worth having the card even if you never use the travel rewards side of it.

Tips for Getting Your Money’s Worth

There are a few ways to get the maximum value out of a credit card with an annual fee. The first is to make sure you use it for everything you can.

That doesn’t mean going into credit card debt to earn a bunch of extra points. If you start paying credit card interest rates on the balance, you’ll never break even or come out ahead on the fee. What we mean is to use the card for as much of your day-to-day spending as you can and then pay it off right away with the cash you would have paid with.

For that strategy to pay off, you need to follow another tip – don’t sign up for more than a couple of rewards cards. Ideally, you should only have one.

If you’re spreading your spending across several cards, you won’t be able to earn enough rewards on any of them to make the fees worthwhile.

Fee or No Fee?

The decision to pay an annual fee or not comes down to whether you can find a card that gives you back more than you’re paying. Finding the right credit card can be a lot of work though, with all the different cards and options available to you.

Bonsai Finance can help. We review all the top cards across many categories including rewards cards, cash-back cards, travel cards, and credit builder cards to find the best of the best. Check out our latest credit card review to find the perfect card for your needs.