When Credit Cards are Worth the Annual Fee

May 29, 2022June 2, 2022 ryan.renkey credit card

Earlier this year I considered whether the Sapphire Reserve card is still worth the annual fee in 2022. While comparing the Chase card lineup was useful for considering whether or not I should downgrade my Sapphire Reserve to a different Chase card, I didn’t consider whether I was better off with a different card issuer altogether. For this post I want to focus on the question of whether high annual fee cards are worth the cost. Is it worthwhile to hold onto a high a high annual fee credit card like the Chase Sapphire Reserve, Capitol One Venture X, or American Express Platinum given the alternative of opting for a no fee 2% rewards card like the PayPal Cashback Mastercard?

Why now?

It might seem like 2022 was just yesterday, but we’re already five months into the year. Soon enough my annual fee will post to my card and I’ll be locked in for another year. But before that happens, I’d like to take a look to see whether I’m benefiting from the relationship or whether I made be better off with a simpler card. Checking the ins and outs of card benefits a couple months out keeps me from scrambling to look at alternatives last minute and seems like a good practice given changing card benefits. Even if I don’t close or downgrade the line of credit, I can rest assured knowing that another piece of my family’s financial house is in order.

If another rewards card is better or I can benefit from a simple 2% cash back rewards card, then I’ll need to decide what to do with my Sapphire Reserve account. There will be no use in keeping a card with such a high annual fee if I’m no longer using it. Instead, I’ll need to choose whether the ask the card company (in this case Chase) to convert the account to one of their no annual fee cards or close the account entirely. On the decision of whether to close the account or downgrade the account there are a few considerations:

How will this affect the age of my credit history? When I reviewed loan applications in one of my previous jobs I saw that closed installment loans like mortgages and auto loans remained on a credit report after being paid off. However, I noticed that revolving loans did not appear on the credit report in the same way if a line of credit was closed. If this were my only account or my oldest account then I would be hesitant to get rid of my credit history and lean strongly towards downgrading rather than closing the account. In my case I have an older account with Navy Federal as well as installment loans like a paid off auto loan from several years ago and a mortgage. If the card no longer makes sense financially then my credit age will not sway me from closing the account.
Do you care about future sign up bonuses? Card issuers often advertise large bonuses to attract new customers and hope that the customer continues to use the card even once the bonus is long gone. If I keep an account open then I can continue to use the line of credit but there will not be a future sign up bonus since I already own the card. However, if it makes sense to switch to another card and I close my old card, then I’ll likely be eligible at some point in the future to get another sign up bonus. I’m not want to play the credit card point churning game, but it certainly doesn’t hurt to leave the option open for a large bonus at some point in the future.
How will this affect my credit utilization? As a rule of thumb it is a bad idea to be opening or closing accounts during a loan application. One way that a credit score can be affected by closing an account is by changing the borrower’s credit card utilization of the percentage of their available credit that is carried as a balance. When you close an account, your available credit will decrease by the amount of the closed account. The credit balance on any remaining accounts won’t change which means that your credit utilization will increase and lead to a drop in credit score. While it is not a good idea to carry a balance, this might be a consideration if you’re in the middle of applying for a loan.

How often to review credit accounts

I hate having to pay the annual fee on my credit card account. Even when I’ve calculated the benefits to exceed the costs, the charge still hits like a dagger. Anticipating this pain, I make sure to review my card annually. If I do pay another annual fee, then I’ll keep the account open for at least another 11 months regardless of how the terms of the card change. This is because once the fee is paid for the year, there is no getting it back. In economics that is something that we refer to as a sunk cost and because the cost is already sunk it shouldn’t affect your decision making.

Checking card benefits is understandably not at the top of most people’s to-do lists. But even if you don’t check every year, it’s probably a good idea to check if a card is worthwhile if you’ve experienced a major change in your life such as:

Leaving the military and losing an annual fee waiver for your card
A change, especially a drop, in income
Switching careers from a high travel job in something like consulting to a job with far less travel
Having children. Have you ever tried flying with young kids?
Changes in health that could limit travel

I find it useful to remember that regardless of the annual fee I paid last year for a credit card, I’m not obligated to continue to pay this year. There are considerations about downgrading or closing an account, of course, but no one is going to for me to keep paying for a service I no longer want.

So, are these credit cards worth the annual fee?

Whether the rewards from a credit card with a fee outweigh a generic 2% cash back card with no fee depends on by how much the rewards rate for the card exceeds 2%, how much you spend in each category that exceeds 2% rewards, and how much the annual fee costs net of benefits. Each of these three factors requires a few assumptions when considering each card.

The rewards rates are published on the issuers sites and are easy enough to find. The rewards differ based on spending categories like dining or travel, but these tend to stay fairly consistent. For some of these cards there are differing rates between travel booked through the issuer’s booking portal versus a third party site like Expedia. There can also be a further distinction between booking flights rather than hotels or rental cars. When there was a separate rate between travel components, I grouped them together using the lower multiplier. For example, the Sapphire Reserve uses a 5x multiplier for travel booked through the Chase Ultimate Rewards portal even though the actual rate is 10x for hotels and car rentals.

I used my own spending habits from 2021 as a low end baseline for the amount of spending in each category of travel, dining, and other. I found that when I excluded a clear one-off payment of nearly $10k in cross-country moving expenses (ouch!), my family spent 12% of our credit card purchases on travel and 7% on dining out. For debt savvy parents out there you think they travel and dine out much more frequently, I’ve also included scenarios where double the amount is spent on travel (24%) and dining (14%). I also reason that the overall amount of card spending is proportional to income in order to calculate the recommended incomes.

For the net annual fee I subtracted the benefits that, based on my discretion, take very little effort to use. For the Chase and Capitol One cards this meant subtracting the travel credits and for the American Express card this meant subtracting the digital entertainment subscription credit. At this stage in my life with a family, I have no desire to spend time trying to maximize the various benefits of each card to extract the most value. I’d rather spend my time going to the park, beach, or drive-in theater

American Express Platinum

The AMEX Platinum card with a whopping $695 annual fee needs to create a lot of value to justify its price tag. Unfortunately, the only the travel category of purchases is eligible for bonus rewards at a 5x multiplier when booked through the AMEX portal. Due to the low 1x multiplier on all non-travel purchases this card should only be used for flights and hotels and only ever through the AMEX travel portal. Any other purchases are better placed on a 2% back card since you can get one with no annual fee.

While the card should only be used for flights and hotels, there are a couple benefits which do defray the annual fee expense such as the digital entertainment credit which will cover up to $20/month in credits for streaming services and access to Walmart+ which could be a potential replacement for Amazon Prime. The other benefits seem too difficult to take full advantage of without spending needlessly though YMMV.

Given the high fee, the specific use cases for benefits, and limited rewards rates, a consumer needs to spend $8500 annually on flights and hotels booked through AMEX travel to make the card worthwhile. This implies an annual income of over $200,000 if you allocate a quarter of your card spending towards travel.

Projected income needed to make the AMEX Platinum beneficial to me based on my spending habits

	Low Travel	High Travel
Digital Entertainment Credit	$161,000	$80,000
Digital Entertainment & Walmart+ Credit	$410,000	$205,000

Sapphire Reserve

I’ve had this card ever since shortly after I graduated college and took a job in a traveling role in customer success. The sign-up bonus was worth $1,500 and lined up perfectly with my plan to book a nice engagement trip and the ongoing travel benefits made the card an easy choice in a pre-Covid world.

Today the card still offers competitive benefits in the rewards card industry with as much as 15% back in points when you book flights through the Chase Ultimate Reward (UR)s tool and spend your points in a way that earns 50% bonus points. Even when you book travel through other sites, you can still get up to 4.5% back. The high rewards rates combined with an easy to use $300 travel credit makes it a worthy credit card for any traveler with an above average income.

Projected income needed for Chase Sapphire Reserve

	Low Travel	High Travel
Booking with Chase UR	$140,000	$79,000
Booking w/o Chase UR	$214,000	$131,000

*Unfortunately the DoorDash credit appears to be gone. Bummer

To my surprise, I’d actually be better off by about $30/year by switching to a basic 2% cash back card! This was a surprise to me because I’m still receiving about $100 more in rewards as compared to Chase’s basic card. Even so, for a mere $30 it’s not really worth the hassle for me to make the switch and it’s not unlikely that I’ll break even relative to a 2% back card in future years.

Capitol One Venture X

Last up is the card that wants to be in your wallet. Between the annual $300 travel credit, Priority Pass lounge access, and travel rewards, it’s hard to tell the difference between this card and the Sapphire Reserve. The primary difference between this card and the Sapphire Reserve is that dining earns only a standard 2x multiplier and travel booked outside of the Capitol One travel portal only earns a 2x points multiplier.

Projected income needed for Capitol One Venture X

Low Travel	High Travel
$153,000	$76,000

Closing

While you might find my calculations useful, these income estimates are guidelines based on my own spending habits. For a more accurate estimate of whether a credit card is worth the annual fee, consider pulling your statements from the past year to determine how much you spend in each category and in total as I did. At the very least this will provide a clear picture of your spending.