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Given how much Americans love credit cards, you wouldn't expect them to shy away from annual fees. That said, only one in four cardholders are willing to pay to use their credit account, according to a 2017 Bankrate report.
It's true that all not all credit card fees are justified, but shunning annual fees altogether could be costing you even bigger rewards. Follow these steps to weigh the tangible merits of credit card rewards against their annual fees.
1. Decide what you want, and do the math
How do you want your credit card to work for you? Are you interested in frequent flyer miles or cash? Deciding what you want to earn from your credit card rewards is the best way to ensure that the annual fee is a wise investment. For instance, suppose you travel often and want to reap the benefits of all those hours in the air. The American Express (NYSE: AXP) Platinum Card offers five times the points for every dollar you spend on flights, but the annual fee is a hefty $550.
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How will you know if it's worth it? Do a test drive by booking a few hypothetical trips. Let's say you travel three times a year and each flight costs around $600, which translates to 9,000 points (or $90) when you book with your Platinum card. Not much, right? But the benefits don't stop there: Remember the other things that dig into your wallet while you're traveling, like a hotel, a rental car, cabs, dining out, etc. When deciding on a card, focus on how it will impact your entire travel experience. In the case of the Amex Platinum card, some of the annual benefits include:
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Five times the membership rewards points on hotels booked through its website.
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Hotel benefits, including free room upgrades, with an average value of $550.
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A $75 hotel credit when you spend two consecutive nights at a qualifying hotel.
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A $200 airline travel credit that you can use to check baggage and order in-flight amenities like snacks and Wi-Fi.
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A $200 Uber credit for rides around town, or to and from the airport.
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Free insurance coverage for rental cars and 24/7 roadside assistance.
The full value of these benefits (assuming you use them all), combined with your airline rewards, will more than eclipse the annual fee. When choosing a credit card, compare the benefits to all your financial needs. You might be missing some perks that justify the up-front cost.
2. Consider the lifestyle potential
Comparing fees to reward values is a start, but what about the other ways credit card benefits can improve your life, like helping you pay off debt or finally plan for retirement? If we're talking about the latter, a cash-back credit card can boost your long-term savings. Let's assume you take the American Express Blue Cash Preferred Card, which has a $95 annual fee. The card offers 6% cash back at U.S. supermarkets for up to $6,000 a year in purchases, then 1% after that. So, in the likely event that you spend $500 a month on groceries, this card will earn you at least $360 a year.