The short answer is, sometimes.


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All rewards cards are different. Some offer cash back or points (Chase Ultimate Rewards), some offer miles (Capital One Venture), and some even offer free nights at hotels. Often no annual fee credit cards offer fewer rewards  and are offered to lower credit score brackets.

In order to determine if an annual fee is worth it, you need to know the cash equivalent value of these rewards. Often with points and miles programs, the cash value is usually $1 for every 100 points or miles. It can get a lot more complicated with true airline miles rewards programs, but generally the conversion is about 1.2 cents per mile.

Which card is better?

Which card is better?

It depends on your annual spending

You Need To Spend Enough to Recoup the Annual Fee Cost

Let’s say you only own one credit card. The credit card happens to be a rewards card that gives you 2% cash back, but has an annual fee of $50. Since this is a rewards card, the amount you need to earn in rewards to make up for the cost of the annual fee depends on your annual spending. The formula for this is simply:

Annual Spend = (Annual Fee)/(Rewards Percentage)

As you can see from the graph of the formula below, the break-even point is $2,500 spent annually:

Annual Fee Credit Card Analysis for One Card

Comparing Cards with Different Annual Fees and Rewards Percentages

Now let’s say that you are comparing two credit cards. Once you have the cash equivalent rewards value of your two rewards cards (for comparison’s sake), the annual fees, and rewards percentage (5% cash back, 2 miles per dollar, etc.), it’s time to figure out whether the annual fee is actually worth it. Here comes the math!   Here’s the formula for the break-even to compare two rewards cards:

(Annual Spending) x (Card 1 Rewards Percentage) – (Card 1 Annual Fee)
=
(Annual Spending) x (Card 2 Rewards Percentage) – (Card 2 Annual Fee)

If you’re not so good with math, you can reduce this formula to:

Annual Spending = (Card 2 Annual Fee + Card 1 Annual Fee) / (Card 1 Rewards Percentage – Card 2 Rewards Percentage)

Ultimately what we’re trying to find is the break-even point for annual spending. In layman terms, we’re trying to figure out how much you need to spend in a year in order to make paying an annual fee worth the cost.

Now let’s say you make these following assumptions:

Card 1 Rewards:              2%
Card 1 Annual Fee:        $50
Card 2 Rewards:         1.25%
Card 2 Annual Fee:          $0

Using the formula from above, we’d expect the break-even point to be an annual spending limit of $6,666.67 ($50/0.75%).

You can see this solution in the graph below:

Annual Fee Credit Card Analysis

Of course the break-even point will shift depending on the annual fee and the rewards percentage. Let’s take one extreme for example. Let’s assume that the two cards offer the same rewards percentage, but have different annual fees. Logic suggests that the lower annual fee card is the winner, but here’s the graph to prove it.

Annual Fee Credit Card Analysis 2

Know Your Credit Score

Often premium rewards cards with no annual fee require an Excellent credit rating. Unless you’re able to pay off the balance in full each month, a rewards card may not be for you since interest rates often hover over 20% for premium rewards cards. Credit card companies don’t want to pay you rewards unless they’re sure they will make a profit when things are all said and done.

Should You Pay the Annual Fee?

Here’s a calculator to tell you whether you should pay the annual fee.

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