Given how much Americans love credit cards, you wouldn't expect them to shy away from annual fees. That said, only one in four cardholders are willing to pay to use their credit account, according to a 2017 Bankrate report

It's true that all not all credit card fees are justified, but shunning annual fees altogether could be costing you even bigger rewards. Follow these steps to weigh the tangible merits of credit card rewards against their annual fees. 

1. Decide what you want, and do the math 

How do you want your credit card to work for you? Are you interested in frequent flyer miles or cash? Deciding what you want to earn from your credit card rewards is the best way to ensure that the annual fee is a wise investment. For instance, suppose you travel often and want to reap the benefits of all those hours in the air. The American Express (NYSE:AXP) Platinum Card offers five times the points for every dollar you spend on flights, but the annual fee is a hefty $550. 

credit cards

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How will you know if it's worth it? Do a test drive by booking a few hypothetical trips. Let's say you travel three times a year and each flight costs around $600, which translates to 9,000 points (or $90) when you book with your Platinum card. Not much, right? But the benefits don't stop there: Remember the other things that dig into your wallet while you're traveling, like a hotel, a rental car, cabs, dining out, etc. When deciding on a card, focus on how it will impact your entire travel experience. In the case of the Amex Platinum card, some of the annual benefits include:

  • Five times the membership rewards points on hotels booked through its website.
  • Hotel benefits, including free room upgrades, with an average value of $550.
  • A $75 hotel credit when you spend two consecutive nights at a qualifying hotel.
  • A $200 airline travel credit that you can use to check baggage and order in-flight amenities like snacks and Wi-Fi.
  • A $200 Uber credit for rides around town, or to and from the airport.
  • Free insurance coverage for rental cars and 24/7 roadside assistance.

The full value of these benefits (assuming you use them all), combined with your airline rewards, will more than eclipse the annual fee. When choosing a credit card, compare the benefits to all your financial needs. You might be missing some perks that justify the up-front cost. 

2. Consider the lifestyle potential

Comparing fees to reward values is a start, but what about the other ways credit card benefits can improve your life, like helping you pay off debt or finally plan for retirement? If we're talking about the latter, a cash-back credit card can boost your long-term savings. Let's assume you take the American Express Blue Cash Preferred Card, which has a $95 annual fee. The card offers 6% cash back at U.S. supermarkets for up to $6,000 a year in purchases, then 1% after that. So, in the likely event that you spend $500 a month on groceries, this card will earn you at least $360 a year.

mature man in hammock

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It also provides 3% cash back at U.S. gas stations and select U.S. department stores. The average American paid about $1,977 to fill up on gas last year, according to an Energy Information Administration (EIA) report, which would earn another $59 in rewards. Finally, you'll earn 1% cash back on all other purchases. If you're like average Americans, who pay off their balances from month to month, according to Experian, your $13,848 in annual charges will yield another $139 in cash back.

Putting it all together, your annual cash back would total at least $463 after deducting the annual fee. While it's true that the card pays out benefits in credits and gift cards, you can adjust your budget to account for the monthly savings by funneling more money into your 401(k) or other long-term savings account. In this case, $463 works out to an additional $38.58 saved per month. While it doesn't sound like much, compounding interest can yield big rewards over time: 

Years of Investing $38.58 a Month Earnings (Assumes a 7% Average Annual Return)
10 $7,307
15 $12,911
20 $20,771
25 $31,795
30 $47,256
35 $68,941

You can't afford to overlook nearly $69,000 in retirement funds, and as you can see, saving it over time is virtually painless. Think strategically about how to make the most of your credit card benefits. The right move could literally change your lifestyle. 

3. Aim for credit score greatness

It's no secret that the most desirable credit cards usually come with annual fees, but there's another requirement that needs your attention: your credit rating. Most high-end cards list "good" to "excellent" credit as a qualifier for cardholders, which includes scores between 670 and 850 points, according to Experian (that said, keep in mind that credit card companies often have their own criteria when it comes to approving an application). Rather than exclude yourself from the running, consider it a challenge to get your financial house in order by improving your scores. The rewards that come with better credit will outshine any benefits from a credit card.

money under umbrella fund

Image source: Getty Images.

For example, a 685-point credit score will qualify you for a $300,000 mortgage at 4.288% APR, according to myFICO. On the other hand, increasing your score to 760 will lower your interest rate to 3.889% APR. That may not sound like much, but it would save you nearly $25,000 in interest over the life of the loan. With all that extra cash, you'll be able to use your new credit card wisely. 

Spending can be painful, but don't let an unfounded fear of annual fees keep you from reaping bigger rewards. Dust off your arithmetic skills and consider the bigger picture. 

Sarah Szczypinski has no position in any of the stocks mentioned. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy. The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool's alone and have not been provided or endorsed by bank advertisers. Review The Motley Fool’s ratings methodology to uncover how we pick the best credit cards.