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Rewards are Great, But Are the Fees Worth It?

How much do you spend in an average week? How about in a month? There are a lot of credit cards offering rewards for your purchases. Unfortunately, most of the good ones come with an annual fee. Is it worth paying or not? The answer depends on you!

Travel perks
You can find cards with excellent airline and hotel perks for pretty much every major brand. Most offer some variation on the same type of perks. In general, the airline cards let you earn miles and give you some perks when you fly, such as free checked bags and priority boarding. Hotel cards offer points toward free rooms, and some give upgraded status which can get you room upgrades and other perks.

For an excellent example of the difference in annual fees, check out the Delta SkyMiles American Express series of cards. This is a unique example, as they come in three levels (gold, platinum, and reserve) with three different annual fees ($95, $195, and $450). As would be expected, the higher the level, the better the perks are, but if you don't take advantage, the fee isn't worth it.

For instance, the gold card lets you earn miles and gives you free checked bags for everyone on your reservation. So, if you and your spouse take just one round-trip flight in a year and check your bags, the fee was worth it. Platinum adds the ability to let you earn qualification miles to earn a higher status, which is a pretty meaningless per unless you fly frequently, but you also get a free companion coach ticket each year you renew the card. So, if you travel more than just occasionally, the platinum card and its fee may be worth it.

The reserve card adds perks such as free access to the Sky Club at the airport, which can be worth it if you fly a lot, as membership costs $50 per visit or $695 per year. I don't know about you, but I would need to fly quite a lot to justify the $450 fee.

"Reward" dollars
Perhaps the best bang for your buck is the rewards offered by individual stores when you use their credit cards, but they are only worth it if you shop at the store enough.

Let's look at an example. I, like a lot of guys, love to go look at the latest electronics and gadgets at Best Buy. The Best Buy Reward Zone MasterCard offers 5% back in reward dollars on purchases made at Best Buy, which is pretty generous, and comes with a $59 annual fee. So, in order to earn enough "reward certificates" to cover the annual fee, you need to spend $1,180 in the stores. If you plan on spending more, the card is probably worth having. If not, you're better off looking elsewhere.

A lot of stores have similar offers, so it isn't a bad idea to go through your bank and credit card statements to tally up your annual spending at your favorite stores. A general formula you can use to figure out how much spending makes a card worth it is to take the annual fee, and divide it by the "reward" percentage. So, for a card with a $75 annual fee and a 4% reward rate, 75/0.04 = $1,875.

Do your homework and get creative!
So, even though you like to fly, stay in nice hotels, or shop at your favorite stores, it still may not be worth it to get their credit cards. Do a little math and figure out whether the perks will make the costs worth it for you. If you fly every other weekend, by all means get the expensive card! On the other hand, if you only fly once or twice a year, there are cards out there offering cash back without an annual fee which might suit you better.

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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