Before You Say No to a Credit Card with Annual Fees, Do This

A credit card with an annual fee can come with a slew of extra perks, from larger welcome bonuses to more generous rates for earning points or miles. But the fees can be costly, sometimes costing as much as $695 per year.

Of course, you don't have to pay an annual fee to have a great credit card. In fact, plenty of no fee cards exist, some of which rival even those that have annual fees. But if you spend enough on your credit card each year, you might be missing out on more lucrative rewards and perks by avoiding annual fees. Before you say no to that credit card with an annual fee, let's take a look at when it might benefit you to get one.

When paying an annual fee is worth it

A card with an annual fee is worth it when it generates more annual rewards or cash back than the fee costs you. Not only that, but they're generally worth it when their rewards exceed what you could have earned on a similar card with no fee.

For example, consider two credit cards that have similar rewards programs: the Capital One Savor Cash Rewards Credit Card and the Capital One SavorOne Cash Rewards Credit Card. The Capital One Savor Cash Rewards Credit Card has a $95 annual fee but earns 4% back on dining, entertainment, and popular streaming services. The Capital One SavorOne Cash Rewards Credit Card has an annual fee of $0 and earns 3% cash back on those same spending categories.

At what point does the Capital One Savor Cash Rewards Credit Card become more lucrative than its no-fee counterpart? Here's the formula:

Annual fee / (difference between rewards) = Break-even point

In this example, the annual fee is $95. If we divide this by the difference in rewards (4% − 3% = 1%, or 0.01), we'll see that the break even point is $9,500. If you spend at least $9,500 in these three categories annually, the Capital One Savor Cash Rewards Credit Card becomes more profitable, in spite of its $95 annual fee. So if you spend $12,000 on the Capital One Savor Cash Rewards Credit Card, you'd net $385 in rewards ($480 − $95). If you had spent $12,000 on the Capital One SavorOne Cash Rewards Credit Card, you would have earned $360.

Annual fee credit cards may come with more perks

The example above works when comparing the earn rates on cash back credit cards. But many rewards cards with annual fees come with other lucrative perks that could add extra value to the total package.

For instance, some airline credit cards will entitle you to a free checked bag, priority boarding, airport lounge access, or annual credits to use toward air travel purchases. Likewise, the most luxurious hotel credit cards will give you free nights, complimentary elite status, and booking discounts. If you're a frequent traveler who can benefit from these extra perks, getting them with your credit card can certainly make paying an annual fee worth it.

Likewise, annual fee credit cards typically come with higher welcome bonuses that can more than pay for the fee itself. While I would hesitate to pick a credit card based on the welcome bonus alone (since you can earn more rewards over the long run with a card that matches your spending), it's icing on the cake when you find a card that suits you.

If you can snag a welcome bonus on a card that earns you generously, it can make financial sense to continue paying the annual fee for a credit card. Run the numbers for yourself before you write off the idea of getting a card with an annual fee. Sometimes, you can come out on top by paying the fee upfront.