Why Should You Pay Annual Fees for Credit Cards?

Getting into the habit of paying annual fees on credit cards, when they’re worthwhile, is a natural part of progressing from a beginner Miles & Points collector to a more advanced user.

But for the most part, the conventional thinking in the domain of personal finance emphasizes minimizing unnecessary out-of-pocket expenses and avoiding annual fees, so there’s undeniably a bit of a mental block that needs to be overcome at the start in order to get “comfortable” with paying significant sums of money for the privilege of getting a credit card. 

In this article, we’ll look at many of the reasons why it’s worthwhile to pay annual fees as you seek to earn large volumes of points, and what steps can be taken to soften the blow and make the $499 outlays an easier pill to swallow.


The Points Outweigh the Cost

The general principle is that credit card annual fees are easily justifiable if it’s outweighed by what you receive in exchange on the card, which usually takes the form of a generous signup bonus.

The two most noteworthy credit cards in our space with high annual fees are probably the American Express Business Platinum Card and the American Express Platinum Card. The former comes with an annual fee of $499, which you pay upfront on the first statement, while the latter has an even higher price tag of $699, although the $200 annual travel credit (which can be converted to cash via the refundable hotel trick) brings that down to a net $499 as well.

 
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So you’ll find yourself $499 out-of-pocket in applying for each of these cards. What do you get in return?

On the Business Platinum, you’ll earn 75,000 Amex MR points upon spending $7,000 in the first three months. Remember to factor in the 1.25x points you earn on that minimum spending as well, for a total of 83,750 MR points. 

Now, as someone who almost exclusively redeems these points for flights in premium cabins, I personally value Amex MR points at 2.4 cents each, so this stash of 83,750 would be worth $2,010 to me, which clearly far outweighs the $499 upfront expense. 

Redeem 75,000 Aeroplan miles for a business class flight to Asia

Redeem 75,000 Aeroplan miles for a business class flight to Asia

But perhaps you aren’t quite certain what you’ll be willing or able to redeem them for in the future. It might therefore be more useful to think about the minimum value of these points of 1 cent per point (cpp), in which case 83,750 MR points would be worth $837.50, so you’re coming out ahead by $338.50 compared to the $499 annual fee. 

It’s a similar story with the Platinum Card. You’ll earn at least 65,000 MR points after meeting the minimum spending of $5,000 in the first three months (60,000 points as a welcome bonus, plus at least 5,000 points if you exclusively put your spending on the 1x categories), which outweighs the $499 net annual fee even if you value the points at 1cpp, and far outstrips the fee if you consider MR points to be more valuable than that, which almost everyone does.


The Perks and Benefits 

Looking at the signup bonus alone, you’re already coming out ahead – but what about all the other perks that come with the card? Both the personal and business versions of American Express’s high-end consumer product offer unlimited Priority Pass lounge access, which is something I never travel without.

Even as someone who likes to fly in business class or First Class as much as possible, I still find myself booking short-haul economy class flights on a semi-regular basis. After all, it doesn’t always make sense to pay the premium (in either points or cash) on a flight that’s 1–3 hours long, especially when budget carriers like Ryanair or AirAsia can get the job done for a fraction of the price.

Plaza Premium Lounge Vancouver (International)

Plaza Premium Lounge Vancouver (International)

Priority Pass lounges are therefore invaluable to me across my travels, giving me a place to relax, eat, and catch up on work before my flight no matter which class of service I’ve booked. Everyone will value lounge access differently depending on how often they travel, but there’s no doubt that the Priority Pass benefit is a net positive, which builds upon the value provided by the signup bonus to make the annual fees well worth paying.

Another example takes the form of the Marriott Bonvoy credit cards. The personal and business Bonvoy cards have annual fees of $120 and $150 respectively, which are currently partially offset by a $20 cash back offer from Great Canadian Rebates.

 
 

When signing up for one of these cards, you’ll receive 50,000 Bonvoy points as a signup bonus, which is easily redeemable for multiple times the value of the annual fees. But beyond the points themselves, the ongoing benefits you get on every membership anniversary can even justify keeping the cards open in the long term. 

Specifically, for both of these cards, you earn an anniversary free night certificate worth up to 35,000 Bonvoy points on every card anniversary date. You’ll need to think carefully about the optimal use of this certificate, but it won’t be hard to redeem it for a hotel night that would otherwise cost you $350+ in ordinary circumstances, or even $500+ if you redeem the free night during high season when hotel prices are elevated.

Redeem your free night certificate at the  Westin Perth

Redeem your free night certificate at the Westin Perth

You’re basically paying $120–150 every year for something that’s worth $350+ in return, so as long as travel is part of your budget and you’d be paying for hotels otherwise, it’s a good deal to keep these credit cards around.

Of course, it can be an even better deal to cancel the card and reapply to get the signup bonus again, but that depends on how lenient Amex is feeling these days


You Will Earn Points Much Faster

The basic idea of paying annual fees is that you get much more in return, but if we zoom out and think about the practice of amassing large volumes of points through signup bonuses to travel the world, then we see that incorporating high-value credit cards into your strategy allows you to earn points much faster.

When people are just starting out with Miles & Points, it can be a good idea to stick to the no-fee cards, or cards that have a first-year annual fee waiver, in order to test things out and develop comfort with the process. But the life principle of “no risk, no reward” rings ever so true, and the credit cards with lower upfront outlays also tend to have lower welcome bonuses to your pad your points balance.

At the moment, the two most appealing credit cards with first-year fee waivers are probably the Amex Gold Rewards Card via Perkopolis (25,000 MR points with a statement credit to offset the annual fee) and the TD Aeroplan Visa Infinite (25,000 Aeroplan miles with a first-year fee waiver). The RBC Avion (20,000 Avion points with a first-year fee waiver) and MBNA Alaska (up to 30,000 Alaska miles with a small net $39 fee) might be outside contenders as well.

 
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Compare those sums to the massive 75,000 and 60,000 MR points offered up on the Amex Business Platinum and Amex Platinum, respectively, and you can see how a willingness to “pay to play”, so to speak, would allow you to rack up the bonuses much faster and take many more amazing trips in the same timespan.

Of course, if you’re happy to patiently build up your balance with as little out-of-pocket spending as possible, and aren’t in too much of a hurry to redeem your miles for a trip, then it can make sense to stick to the lower-end products.

But if you want to treat yourself to as many points-funded trips as possible, then time will be of the essence – and hey, you can buy points (which is effectively what you’re doing in paying these annual fees), but you can’t buy time! 


The Points Can Offset the Cost of the Annual Fee

Okay, so it’s not too difficult to grasp the concept of why it may be worthwhile to pay annual fees. But some of you might still be running into that mental block of paying $499 just for a credit card. I say that because I, too, felt that mental block when I was just starting out, and restricted myself to the “easy” no-fee products in my first few years of doing this.

Well, here’s what makes the decision a no-brainer. Remember how the minimum value of an Amex MR point was 1cpp? You can very easily “cash out” the MR points you earn as part of your signup bonus and convert them directly into money in your bank account at this value!

In doing so, you’re effectively maintaining a net $0 out-of-pocket expense, while still collecting some additional bonus points and getting to enjoy the perks and benefits of the card. So on the Business Platinum, for example, you’ll take 49,900 of your 83,750 MR points, and use the Pay with Points feature to apply it as a $499 statement credit to offset your annual fee.

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You’re left with 33,850 MR points as your “signup bonus” – which is already a round-trip flight within North America or a one-way flight to Europe (or you can use it to build your balance towards a larger redemption).

(On the Platinum Card and other Membership Rewards cards, the Pay with Points feature gives you 1cpp only on travel purchases, with 0.7cpp being distributed for other statement charges, so you’ll want to leverage the refundable hotel trick to cash out your points at 1cpp.)

Now, I don’t like to over-emphasize this method of earning Miles & Points, because it kills me inside to see MR points being redeemed in this fashion when they could be redeemed at a much higher value.

But I can definitely see how this technique could be beneficial to those of you who are perhaps more cautious in your spending, or who aren’t in the financial position to stump up annual fees at the moment, but would still like to capture the additional value presented by all the different credit card offers out there.


Conclusion

Credit card annual fees are daunting at first, but taking into account all of the above, there’s really no reason to avoid them at all. The points you earn as part of the welcome bonus generally outweigh the fee itself (and if it doesn’t, as in the case of less-discussed products like the Amex AeroplanPlus cards, then it’s not going to be a card worth getting).

Meanwhile, the ancillary perks, such as unlimited Priority Pass lounge access, are the icing on the cake, and the fact that you get to accumulate points much faster is the cherry on top. And if all that’s still not irresistible enough for you to take a bite, then you always have the option of using part of the signup bonus to offset the annual fee and maintain a $0 net spend at all times.