Rewards and fees…

They’re the 2 things you’re likely thinking about most when it comes to getting a new credit card.

We know we want the most rewards possible, but what about the annual fees?

How do we decide when dishing out cash at the end of each year is worth the rewards we get?

One great way of looking at it – do the rewards offset the annual fee? If so, then it’s obviously worth it…but this also involves comparing virtually every card on the market.

Don’t worry – this guide (and our Compare Cards page) can do all the work for you.

Let’s strap in.

Related: 5 Genius Ways To Use Your Credit Card Like A Pro

When is a credit card annual fee worth it?

To decide whether or not to pay an annual fee, there’s a simple formula you can use to compare 2 different cards:

(Difference in annual fee / Difference in earn rate) / 12 = Monthly required spend

Seems pretty straightforward, right? Put the numbers in and out comes a monthly spend where both cards will give you the same net rewards.

But it’s not that simple.

If the cards you’re looking at have flat earn rates, this works great. But many cards have different categories with different earn rates, and you’re likely to spend at different rates in certain categories. This means your earning potential varies a lot.

An easy way to find this out?

Our compare cards page can help you out. Simply enter in your monthly spending across 8 categories, and we’ll add up the rewards for you. Hover over the total rewards, and you’ll be able to see the net rewards you’ll get for each card.

For the purpose of this article, we’ll compare some cards from the same family to see if we can come up with a rough number to keep in mind.

Comparing annual fee vs no annual fee travel credit cards

Let’s go over a few travel card examples and see what we come up with.

Travel credit card annual fee comparison

First, we’ll look at some hotel cards – the and will do nicely.

Let’s start out with our basic $2,000 per month spend. Each Hilton Honors point is worth 0.48 cents each.

Spend Category & Monthly Spend Hilton Honors Amex Earn Rate Hilton Honors Amex Annual Rewards Hilton Honors Ascend Earn Rate Hilton Honors Ascend Annual Rewards
Gas, restaurants and groceries – $700 5 points per $1 (2.4% return) $202 6 points per $1 (2.88% return) $242
Hilton – $100 7 points per $1 (3.36% return) $40 12 points per $1 (5.76% return) $69
General – $1,200 3 points per $1 (1.44% return) $208 3 points per $1 (1.44% return) $207
Total Rewards 1.875% $450 2.16% $518
Annual Fee $0 ($95)
Net Rewards $450 $423.40

Even at this spend, the no fee card still comes out ahead.

This illustrates an important with hotel and airline perks – many of these cards offer perks with direct monetary value when used once per year, which can offset the annual fees by themselves.

Plus, cards within these families usually have the same (or almost the same) earn rates.

In this case, the offers a free night stay after spending $15,000 per year. Even if the free night is only worth $150, that gives you a net of $55 when you subtract the annual fee.

So, in this case, the break-even point is actually $1,250 – and isn’t based on spend (assuming you’d actually use the annual free night).

Related: Apple Credit Card Review: Is It Worth The Hype?

American Airlines example

As another example, let’s look at the and the .

Both are almost identical in terms of earning AAdvantage miles – the only difference is the earns an extra 1 mile per $1 spent on gas. You’ll need to be spending a whole lot on gas to make the annual fee of $95 worthwhile, just based on spending.

But, travel with American once per year, and you’ll get these perks with the :

  • free first checked bag, a savings of $60, and
  • a $125 American Airlines flight discount after spending $20,000 annually.

Use the free first checked bag more than once per year, and that alone pays for the annual fee. Then if you travel once per year and spend $20,000 on the card, the $125 discount is extra money going right back in your pocket.

So, if you fly on American once per year and spend $1,667 per month, the is the better option.

Otherwise, you may want to stick to free.

Related: Airline Credit Card Face Off – JetBlue Vs Southwest

Comparing annual fee vs no annual fee for cash back credit cards

Now we’ll do a cash back comparison between the and . Starting with our usual $2,000 monthly spend, this is how things could look for you:

Spend Category & Monthly Spend Blue Cash Earn Rate Blue Cash Annual Rewards Blue Cash Preferred Earn Rate Blue Cash Preferred Rewards
Groceries – $350 3% $126 6% $252
Gas stations – $250 2% $60 3% $90
Others – $1,400 1% $168 1% $168
Total Rewards 1.48% $354 2.13% $510
Annual Fee $0 ($95)
Net Rewards $354 $415

In this case, you’re much better off with the .

Now, let’s dial the monthly spending back a bit to around $1,500:

Spend Category & Monthly Spend Blue Cash Earn Rate Blue Cash Annual Rewards Blue Cash Preferred Earn Rate Blue Cash Preferred Rewards
Groceries – $250 3% $90 6% $180
Gas stations – $100 2% $24 3% $35
Others – $1,150 1% $138 1% $138
Total Rewards 1.05% $252 1.48% $354
Annual Fee $0 ($95)
Net Rewards $252 $259

Now we’re almost the same.

So in this case, a $1,500 monthly spend would be the approximate point as to when the annual fee is worth it.

Related: 6 Ways To Cash In On Your Cash Back Credit Card

So when is it worth paying an annual fee?

As a rule of thumb, our number is around $1,500 per year.

For travel cards, it all depends on whether or not you can take advantage of the benefits provided as well. Since most cards that belong to the same airline and hotel chains offer similar rewards, you need to use the perks provided to make the annual fee worthwhile.

For others, spending around $1,500 is a good place to start.

Related: 42 Best Instant Approval Credit Cards In 2020

Your thoughts

What are your thoughts on our number?

Do you agree? Disagree?

Let us know in the comments below.