Some credit cards have no annual fee (AF) while others can have fees that seem ridiculous to some people. In fact, this is probably one of the bigger issues that new people struggle with. They here that a credit card has a big annual fee and they immediately say no. As we’ve already learned, travel hackers are guided by math so we just don’t say no right away. We let the math guide our decisions. This course will help walk you through the math for the first years and subsequent years because the analysis is different. But first, we’ll show how you how to properly value an annual fee; you can’t just go by the dollar amount. Finally, we’ll discuss what to do when you no longer want to pay the annual fee.
Is the AF really that high?
New people see huge annual fees and they just run without asking questions. This is a big mistake because high AFs can often be misleading. Let’s look at the Chase Sapphire Reserve (CSR) which is a popular card that has a high annual fee of $525. Ouch. But here’s the thing, almost no one is actually paying that! Anyone that gets the CSR is a traveler and the CSR has a $300 credit so when you use the card for travel expenses. So whether its a $300 worth of airfare, hotels, car rental, cruises or some mix of those expensive and others, you’ll get that $300 reimbursed every year. Since you were doing to spend that money on travel anyway, this brings the AF down to a much more manageable $225. Still higher than the Chase Sapphire Preferred at $95 but the CSR has way more features. I think most frequent travelers would agree that the CSR is worth the extra $130.
The same analysis can be done with other cards with high AFs. Just a word of warning, don’t try to justify an AF by using credits for things you wouldn’t normally buy. I don’t think that’s really a dollar for dollar offset, but that’s just my opinion. For example, the Amex Business Platinum currently has semi-annual $200 Dell credits. So you can get $400 worth of stuff from Dell. But were you going to buy those things in the first place? If not, than I don’t think you can really say that the AF is reduced by $400. Others may disagree. Either way, don’t be scared of high AFs, do the math.
Of course, these cards may have plenty of other features that are worth far more than the AF but before you can get to that analysis, you first have to determine the true AF. In my opinion, the true AF of the CSR for just about everyone is $225 and not $525. You’ll then use that $225 figure to perform the rest of your analysis.
Initial Annual Fees
This part is pretty easy. Just about every card that has an AF is going to have a sign up bonus (SUB). In just about any situation, the SUB will justify the AF. First, we need to know what the AF is, most are $95 but some are much higher as we’ve previously discussed. Let’s go back to the CSR with it’s AF of $525. Let’s assume for a second that there’s no travel credit or other features of value and that the SUB is 60,000. Is that worth it? Well we know that UR’s are worth 2cpp so 60,000 x 0.02 = $1200. Since $1,200 is greater than $525, it’s certainly worth it for the first year. But since we learned to account for any things like travel reimbursements, we know that the real figure is $225. I don’t know about you but I’ll pay $225 to get $1200 worth of travel any day of the week!
This same math works with any card. You just need to know the value of the points. Remember, just because a card offers a ton of points, it doesn’t mean that those points are worth much. Some are worth 1/4 of what Chase’s UR’s are worth. That’s why its important to always do the math. If all you were focused on was getting the best SUB, you’d first calculate the value of each SUB and then subtract by the real AF. The higher total is the better card. Of course, there’s a lot more to selecting a card than looking at the value of the SUB although that is certainly a major factor.
What about after the first year?
This is where things get more interesting. There are plenty of cards where you just want to get the SUB and move one after the first year. It’s very important to not try to close or product change a card before the annual fee hit. More on that later. Let’s look at 2 popular cards, the Chase Hyatt card and the Chase Business Ink Preferred (CBIP). While the Hyatt card has some other benefits that may be useful to a lot of people, let’s just focus one on: the free night certificate. After the first year, you get a free night certificate for every year that you have the card even if you don’t put a dime on it (other than the AF of course). That free night certificate can (should) be used for a hotel up to a category 4 which means that you can a free night that would normally cost anywhere between 12,000 and 18,000 points. Even if we just use it for a 12,000 night award room, that’s $240 worth of value which is certainly greater than the $95 AF. Unless you have no plans on staying in a Hyatt (than why did you get the card in the first place?), the AF pays for itself easily. It’s a no-brainer.
Conversely, the CBIP doesn’t really have much going for it after you hit that amazing SUB. Sure there might be a handful of people that find this card useful for one reason or another, but for most people, I think they dump this card after the first year. 3x on shipping and advertising isn’t useful for most. 3x on internet and phone isn’t as good as the Chase Ink Business Cash. It’s hard to justify the $95 AF when you don’t really use the card.
What to do when the AF is no longer worth it
The worst thing you can do is get a SUB and then close out a card right away. Credit card companies don’t want to feel used like that. If you’re not gonna use the card, just let it sit. Calendar a year from when you opened it to look out for the AF to hit. Wait for that to happen. Once it does, call them up and tell them that you saw the AF. Advise that you don’t use the card that much and you would like to “product change” (PC) the card to something without an AF. You do not want to close it!. When you PC the card to one without an AF, you’ll maintain the same card history which will help your credit score. There are a few occasions where you can’t PC the card to one without an AF so then you will have to close it but thankfully that doesn’t happen often. Either way, you’ll get that AF refunded or they’ll take it off of your bill.
When you get your new card, it may or may not be useful to you. For example, with the CIBP, you can PC to a CIBC which is nice especially for those that exceed the $25,000 limit. However, if your new card is not useful to you, just put it away somewhere. This is called “sock drawering” card since most people will put unused card in a sock drawer or something similar where they just collect dust.
Conclusion
Now that you better understand how to look at an AF the right way, you shouldn’t be scared away by cards with AFs. You should also be able to analyze a card to determine if it’s going to be one year and done or if it’s going to be a keeper. If it is going to be one and done, you know to PC the card whenever you can.
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