Is an Annual-Fee Credit Card Worth It? The Spending Break-Even
A card with a $95 annual fee and higher rewards can beat a no-fee card, or it can quietly cost you money. The test is how much you would need to spend in the bonus categories just to cover the fee.
The break-even spend
Break-even spend per year = annual fee / (reward rate on the fee card - reward rate on the no-fee card).
Example
- Fee card: $95 a year, 3% back on groceries.
- No-fee card: 1.5% back on everything.
- Difference on groceries: 1.5 percentage points.
- Break-even: $95 / 0.015 = about $6,333 a year on groceries, or about $528 a month.
Spend less than that in the bonus category and the no-fee card wins. Spend $9,000 a year and the fee card earns about $40 more after the fee.
What changes the math
- Caps. Many bonus rates stop after a yearly spending limit, so check the fine print.
- Credits you would actually use. A statement credit only counts if you would have spent that money anyway.
- Sign-up bonuses. They help in year one only; judge the card on year two onward.
- Interest. If you carry a balance even occasionally, interest wipes out any reward rate. Rewards only work when the statement is paid in full.
Before the fee posts
Most issuers charge the fee once a year. A month before it posts, check last year’s spending in the bonus categories. If you are below break-even, ask about a no-fee version of the card, which can keep the account open and your credit history intact.
Free tools
- Credit card payoff calculator: https://smartbudgetsheets.surge.sh/calculators/credit-card-payoff-calculator/?utm_source=nostr
- Credit card interest calculator: https://smartbudgetsheets.surge.sh/calculators/credit-card-interest-calculator/?utm_source=nostr
- Debt Payoff Planner, up to 8 debts (Payhip): https://payhip.com/b/PtBLU?utm_source=nostr
- 42 free budget templates, pay what you want ($0 is fine): https://smartbudgetsheet.gumroad.com/l/ngpkrb?utm_source=nostr
General information, not financial advice. Figures are rounded examples.
Write a comment