Credit Card Annual Fees: When Are They Okay?
About every three weeks I get a letter in the mail from American Express begging me to apply for their Rewards Plus Gold Card. And every three weeks I tear up the promotional offer and throw it in the garbage. It’s like clockwork.
Why do I rip up the offer? The card charges a $150 annual fee. I have zero desire to pay $150 extra every year for something I already get for free.
AmEx charge cards, unlike their credit cards, are intended to be paid off in full each month. (There is now an option to repay charge card purchases over time, but this decision is made on a per-purchase basis.) For simplicity, think of a charge card as a debit card that takes a month to debit your account.
Because charge cards do not generally carry a balance, AmEx misses out on the opportunity to profit on interest charges. To compensate American Express for the lost interest revenue, cardholders must pay $150 every year for the “privilege” of carrying the card and earning rewards.
I already have an AmEx Blue Cash credit card which I pay off every month. The card has no annual fee. Since I don’t carry a balance, I never pay fees of any kind. If everyone were like me and paid off their bills every month, I’m sure all credit cards would charge an annual fee. But since most people carry a balance, their interest payments subsidize my card.
So why on earth would someone pay $150 a year for an American Express charge card when they could simply use a normal credit card and pay it off every month? Obviously the benefits of the charge card membership would have to exceed the cost of the card.
Under what circumstances would you recoup your annual fee?
Let’s look at some of the benefits of the AmEx Rewards Plus Gold card and how they differ from the rewards program offered by no-fee credit cards like the AmEx Blue Cash card.
The AmEx charge card rewards system is called “Membership Rewards.” Basically, you earn points on your purchases that can be redeemed towards later purchases with participating merchants. These redemption opportunities are mostly entertainment- and travel-related. Unlike the rewards credit cards, you cannot earn cash back from your Membership Rewards points. AmEx Membership Rewards points may be redeemed for:
- Airline tickets — Your points may exchanged for frequent flier miles on most U.S. airlines. If you have enough points/miles, you can get a free flight without dealing with blackout dates.
- Cruises — Your points may be used toward cruises. Booking your cruise with your AmEx charge card earns you discounts and additional shipboard credit.
- Hotels
- Entertainment — Points may be used to purchase concert tickets, sports tickets, and restaurant credit.
- Shopping at participating retailers.
Points are earned at the rate of 1.5-2.0 per $1 spent on certain travel & entertainment transactions, and 1 per $1 spent on everything else. American Express does its best to conceal the dollar-value of the rewards points. Digging through their online rewards catalog, the redemption value works out to approximately $0.01 per rewards point. So the card’s effective benefit rate is somewhere between 1-2%. At that rate, the points are comparable at best, inferior at worst, to the rewards paid by credit cards that charge no fees!
Obviously these membership reward rebates are not worth $150/yr, when you can get the same rewards value (in cash no less!) from no-fee credit cards. Since the card adds no value in this area, we must look to the other benefits to recoup the annual $150.
Other Benefits — Worth $150?
The Rewards Plus card provides additional consumer protection not normally offered by regular credit cards. Two notable features not offered on other cards:
- Complementary roadside assistance (comparable to AAA’s most basic membership). Value: $50.
- Statement credit for vacations costing $3,000 or more booked through the AmEx travel portal. Value: $150.
- Access to tickets for certain entertainment and sports events before the general public. Value: Up to you.
So theoretically, yes, it is possible under certain conditions to come out ahead by $50 or more.
The Verdict
Most people are probably best off passing on the American Express Rewards Plus Gold Card. Unless you travel extensively or have a hedonistic bent, you most likely will not recover the cost of the annual fee through card benefits.
The same is true for all cards with annual fees. Card issuers that offer rewards make a bet that you will give them more money than they return to you. For credit cards, they assume the average customer will carry a balance and pay finance charges. This permits you to pay off your bill and be a freeloader. When you take finance charge revenue out of the picture (which hopefully you do not pay) and add an annual fee, it becomes unlikely that you will come out ahead.
Don’t automatically accept or reject a card with rewards and an annual fee. Analyze carefully the rewards structure and your spending habits to determine whether the card makes sense for you.
Whatever you do, don’t use rewards as an excuse to spend more than you would otherwise! A 1% discount is nothing to get excited about!
