Why Pay for a Credit Card with an Annual Fee?
For the longest time, I steadfastly refused to get any credit card that came with an annual fee. The idea of paying a price to use a credit card just sounded utterly ridiculous to me. The only time I ever applied for a credit card with an annual fee was when that fee was waived for the first year thanks to a promotion. Of course, I was sure to promptly cancel those cards just before the end of my first year of card membership.
I know many Canadians that are as repulsed by annual fees as I was. But as my financial savvy grew, my perspective changed: it doesn’t matter if your credit card has a fee of $29 or $699—sometimes the benefits offered far outweigh the cost you’re paying. Once I realized this, I had no problem applying for credit cards with an annual fee.
But, does paying a fee make sense for you personally? Let me explain the circumstances in which paying an annual fee for a credit card may be worthwhile for you.
The Signup Bonus
In my opinion, if a credit card offers a signup bonus that is more valuable than the annual fee, then you should seriously consider applying for the card based on that perk alone. Of course, you need to factor in how much you need to spend to get that bonus, and what the bonus is worth after paying the fee. Let’s take a quick look at some of the offers out there.
The best signup bonus deal out there right now is for the BMO World Elite Mastercard, which gives you 35,000 BMO Rewards points when you spend $3,000 in first three months, plus an annual fee waiver for the first year worth $150. The points are worth $250, plus the fee means $400 of value upfront, as long as you can meet the minimum spend.
The Scotiabank Passport Visa Infinite has a signup bonus of 25,000 Scotiabank Rewards points when you charge $1,000 to your card in the first three months. Those points have a value of $250, and the annual fee is $139, so you come out ahead by $111. That doesn’t seem like a great value, but as you’ll find out below, the additional benefits included make this a great card.
There’s also the American Express Cobalt Card, which charges a monthly fee of $10 ($120 annually). When you spend $500 each month, you’ll earn 2,500 points for a total of 30,000 Amex Membership Rewards points in the first year. Those points have a base value of $300—way outpacing the card’s annual fee of $120—and the points can be used for concert tickets, eats & drinks, and more. Also, those same points could be used for an eligible short-haul flight using the Fixed Points Travel Program, so there’s incredible value here.
Keep in mind those signup bonuses are only good for the first year of card membership, which is why you need factor in the following when deciding if you want to keep your card beyond that first year and pay the annual fee.
Rewards Earning Potential
When you’re ready to pick a new rewards or cashback credit card, pay close attention to the multipliers offered. Many credit cards with an annual fee offer anywhere from 2 – 5 times the points on select spending categories, so depending on your budget and lifestyle, paying that yearly fee may very well be worth it.
Let’s assume the following monthly spending for a typical family:
$450 on groceries
$200 on dining and entertainment
$200 on gas
$400 on travel
The Scotiabank Gold American Express Card would suit this budget well, since it yields 4 Scotia Reward points for every $1 spent on gas, groceries, and dining & entertainment. All other purchases earn you 1 point per dollar spent.
This family would earn the following in a year based on their spending:
21,600 points on groceries
9,600 points on dining and entertainment
9,600 points on gas
4,800 points on travel
That’s a total of 45,600 Scotia Reward points they could be earning, which has an approximate cash value of $456, and we’re not even factoring in any additional spending they charge to the card. The Scotiabank Gold Amex does have a fee of $99, but you can see why that seems pretty minor compared to this family’s earning potential.
The above scenario is excellent if you have a family, but what about cards that fit the single lifestyle?
The American Express Cobalt Card holds a lot of appeal for singles, as it offers 5 points for every $1 spent at eligible restaurants, bars, cafés, and food delivery; 2 points for every $1 spent on transit and travel; and 1 point for every $1 spent on all other purchases.
Let’s say your monthly spending looks something like this:
$400 on eating out
$200 on groceries
$300 on public transportation and taxis/Uber
$300 on travel
Based on the above spend, you would be earning 40,800 American Express Membership Rewards points annually, which have an approximate cash value of $408. That’s a pretty good deal even when you factor in the card’s $120 annual fee.
Travel Insurance Benefits
Besides the signup bonuses and multipliers, a card’s included travel insurance may very well make the annual fee that you pay worth it. With some credit cards (particularly travel cards) you can expect the following coverage to be included:
- Emergency Medical Insurance
- Trip Cancellation/Interruption Insurance
- Flight Delay Insurance
- Lost, Stolen, or Delayed Luggage Insurance
- Rental Car Collision/Loss Damage Insurance
- Hotel/Motel Burglary Insurance
- Travel Accident Insurance
If you were to purchase all of that insurance on your own, it would likely cost you more than the annual fee you pay for your credit card.
Some people may not believe that travel insurance is necessary, but note that your provincial health care does not apply when you’re outside of the country. A quick trip to the doctor in a foreign country could cost you hundreds of dollars, while a visit to the emergency room could cost you thousands of dollars.
I was thankful that I had travel insurance when a snowstorm caused the cancellation of my flight in Amsterdam. I was able to book a hotel room at the airport and enjoy a meal knowing that I’d be fully reimbursed by my credit card issuer once I submitted a claim. Other passengers on my flight who didn’t have travel insurance had to wait for the airline to give them meal vouchers and some shoddy rooms for the night.
Don’t Forget about the Additional Benefits
Having travel insurance is great, but sometimes it’s the value of a card’s added perks that should get you excited.
For example, the Scotiabank Passport Visa Infinite comes with an annual standard Priority Pass Membership as well as six free airport lounge passes – that’s a value of $261 USD. When you convert that to Canadian dollars, it works out to about $330 which is significantly more than the $139 annual fee that you pay. Also, there are no foreign transaction fees with this credit card, so you end up saving 2.5% every time you make a purchase in a foreign currency.
Another often-overlooked benefit is the ability to transfer your points to other rewards programs.
The American Express Gold Rewards Card has an annual fee of $150, but you can transfer your points to Aeroplan and Avios at 1:1 ratio. You could also transfer your points to other popular airline and hotel programs such as Delta SkyMiles, Asia Miles, Starwood Preferred Guest, and more.
The card’s signup bonus is 25,000 points, which has a standard value of $250 when making redemptions. However, if you were to convert your points to Aeroplan, you would have 25,000 Aeroplan miles—enough for a flight to anywhere in the continental U.S. and Canada. That flight could easily have a value of $600+.
It may seem odd to consider paying an annual fee strictly for transfer partners, but I’ve personally found this option to be valuable when I need more points to make a redemption. Transferring points is a lot cheaper than spending more money to earn additional points.
Instead of focusing on the fee that you’ll pay every year for a card, take a look at the benefits that you’ll get. Do those benefits outweigh the cost of the annual fee? If the answer is yes, then why not pay it? As long as you pay off your balance in full every month, having card benefits that are worth more than the annual fee is like getting free money. Factor in those signup bonuses and you’ll be scratching your head and wondering why you ever discriminated against cards with annual fees in the first place.