When is a credit card annual fee worth it?

Committing to paying hundreds of dollars a year in annual fees just to own a high-end card may sound crazy to some.

But a growing number of people — myself included — are happily shelling out $100 to $700 a year or more for lucrative cards that promise huge sign-up bonuses and perks that are often worth three figures themselves.

How can you tell if a premium rewards card is right for you?

As is usually the case with credit cards, it comes down to your spending habits. If an annual fee credit card perfectly complements them, it can bring a lot of value, despite the fee.

Still, these cards aren’t for everyone. To get the most out of a premium rewards card, you often have to be very organized and pay attention to your spending to recoup the cost of the annual fee.

Read on to learn how to determine whether an annual fee credit card is right for you.

Why spend money on a premium rewards card?

The latest generation of premium rewards cards aren’t just empty status symbols. Many of the best cards offer so much value that even Gen-Zers and millennials, traumatized by the multiple financial crises they’ve lived through, are snapping them up.

According to travel blogger Rand Shoaf, the savviest cardholders see premium rewards cards as an important tool for saving money, rather than as glitzy status symbols that help you flaunt your wealth.

Meanwhile, credit card issuers have taken notice and have begun crafting rewards programs with increasingly lucrative perks. The freshly revamped Chase Sapphire Reserve card, for example, is so famously popular with millennials and other value-conscious consumers it has helped trigger an arms race among rewards card issuers.

That has sparked a trend toward high-value benefits, such as travel credits so generous they help cancel out the annual fee.

Meanwhile, American Express’ line of cards — which have long reigned as a favorite among affluent customers — have also become increasingly valuable in recent years as the issuer adds contemporary perks, such as credit toward streaming subscriptions.

Shoaf says he’s been surprised by how many people he knows who are carrying around cards that cost three figures a year. “Before, people would shake their heads at that,” he said, in a previous interview.

But now, people are increasingly recognizing they can save a significant amount if they’re willing to invest some money upfront.

What are the benefits of a credit card with an annual fee?

Though some may scoff at the idea of paying a three-digit annual fee, a good, high-end rewards card should offer more than enough value to offset its price tag. For example, some rewards cards with annual fees can offer higher rewards rates than their no-fee counterparts. Some cards may also offer more flexible rewards redemption options, such as the ability to transfer points to airline and hotel partners. Plus, premium cards often offer a greater variety of card benefits like airport lounge access, TSA PreCheck or Global Entry membership, airline fee credits and more.

What kind of benefits you get from a card depends on the type of card you choose. Usually, the more expensive the annual fee, the greater the number of card perks and the higher the earning rate. Some cards offer rewards, such as cash back or points, on everyday spending in categories like groceries, gas, transit and more. Some cards also offer hotel credits and car rental insurance. Other benefits may include a 0 percent APR on new purchases and balance transfers for an intro period and no foreign transaction fees.

What are the drawbacks of a credit card with an annual fee?

While the use of rewards credit cards is surging among millennials and Gen Z, some younger professionals may have a hard time justifying the annual fee.The truth is, the longer you have a rewards card, the more likely it is to add up to big savings.

But if you don’t use the card often or don’t take advantage of the perks and benefits that come with it, you may not get enough value from the card to justify the fee.

Your rewards are quickly negated if you carry a balance on the card from month to month. Whatever your rewards are worth in dollars will easily be overtaken by your interest fees if you cannot keep up with your bills.

These are the potential drawbacks that you must weigh against the benefits. If you’re not careful, you may wind up paying more in interest than your initial annual fee, and you won’t have the opportunity to fully enjoy the benefits that your premium card grants you.

How to find a premium card that’s right for you

Not all premium rewards cards are a good deal, though, so it’s crucial to do your research before you settle on a card. Some cards offer more pizazz — and heavily marketed metal — than rewards substance. Others are great for frequent travelers but are grossly overpriced for everyone else.

To find a card that’s worth paying money for, you want to think about not only what kinds of rewards programs you’d enjoy, but also whether you’ll be able to take advantage of all that a card offers.

Of course, visiting an airport lounge sounds exciting. But if you’re never in an airport long enough to spend more than a few minutes in a lounge, then that perk will just go to waste.

“A lot of times, people will get caught up in the promotions,” said Mero Geesey, a travel expert and owner of Fly with Points, in a previous interview. “You really have to be careful. It may sound better than it actually is.”

How do you determine if a credit card with an annual fee is right for you

To decide if a credit card with an annual fee is right for you, you may need to do a bit of math. With a cash back card, it’s relatively straightforward to know whether the rewards offset the cost of the annual fee.

Calculating the perks of a travel rewards or points card may take a bit more effort. You’ll need to look into the redemption value of points or miles of the rewards program your card is a part of. Also keep in mind that if the card has substantial rewards or a bonus offer, you may earn enough to cover the annual fee, plus some extra.

Can you afford the card’s sign-up bonus?

Cards that charge an annual fee often lure new cardholders with juicy sign-up bonuses that can add up to hundreds of dollars in free travel or other perks. However, they also frequently require a ton of spending in your first few months of card ownership.

The more expensive the card, the more you’re typically asked to spend to earn a bonus. For example, you could be asked to spend anywhere from $3,000 to $5,000 within the first few months of opening your new card. If you can’t afford to spend that much at one time, you could wind up foregoing the bonus altogether — or racking up more debt.

Do the bonus categories match your spending habits?

A big sign-up bonus and lucrative side benefits can only get you so far. If your new card doesn’t match your spending habits, then you may have a tough time holding onto it for more than a year.

For instance, if you’re looking for a card that rewards grocery spending, consider the Blue Cash Preferred® Card from American Express. If you also like going out to restaurants, maybe the American Express® Gold Card would suit you better. The right card for you should match your lifestyle.

Before you get too excited about a card’s promotions, you should look carefully at a card’s bonus categories (and what does and does not qualify under said category) and if your spending patterns match.

For example, many premium cards offer bonuses on travel, but their definition of travel may only include airfare booked directly with an airline or the issuer. Similarly, they may only let you use your travel credit on incidental airline fees, such as checked baggage. Other cards are more flexible with their definition of travel, which can include everything from public transportation to highway tolls, parking and Uber. Such is the case with the $300 annual travel credit provided by the Chase Sapphire Reserve.

Will you use the ancillary benefits?

This is, by far, one of the most important questions to ask yourself when evaluating a premium credit card. High-end cards are often packed with lucrative benefits that look great on paper but aren’t always very practical to use.

For example, some cards offer resort credits you can use to pay for massages or food, but the credits are hard to use because they are available only at select hotels, says Shoaf.

Similarly, you may find it tough to take advantage of a statement credit for a Global Entry or TSA PreCheck application if you don’t fly regularly.

How often do you travel?

If you travel only occasionally or prefer more flexibility with your points, a general travel card that allows you to transfer points to other loyalty partners is likely your best bet.

“If you’re not a frequent flyer, you’re not locked down,” says Shoaf. “You can choose which airlines you want to transfer your points to.”

But if you spend a lot of time in the air and have a preferred airline, you may be better off with a co-branded airline card. Many airline cards with annual fees offer lucrative perks, such as complimentary or discounted companion tickets.

Don’t feel like you need to spend money on a travel card if you rarely venture beyond your hometown more than a few times a year. These days, there are premium cards for a wide variety of spending categories, including restaurants and entertainment, groceries and gas.

What do you care about more: comfort or value?

Deciding whether a card is worth its annual fee also comes down to what you value and what you’re willing to spend money on. If you value luxury and comfort, for example, then you may be happier with a card such as The Platinum Card® from American Express, which offers plusher service and experiences for a $695 annual fee.

However, if you’re eager to build a big collection of rewards, you may find the Platinum Card disappointing. It only offers bonus points on flights and prepaid hotels booked with Amex Travel or directly with the airlines.

On the other hand, the Platinum’s sister card, the Amex Gold Card, doesn’t come with as many high-end perks but can offer great value with generous statement credits and rewards in lucrative categories. The card comes with up to $120 in Uber Cash credits annually for U.S. Eats orders and rides and up to $120 in dining credits annually (also $10 per month) for eligible restaurants and delivery services. It’s now the highlight of the first week of each month for me, as I use these monthly credits as soon as they become available.

Can you get similar benefits from a less expensive credit card?

As competition for new cardholders continues to heat up, lenders are increasingly adding lucrative perks to cards with lower fees. At one time, travel credits, such as application fee credits for TSA PreCheck or Global Entry, were only found on premium cards with three-figure fees.

But now, even lower-tier cards, such as the Capital One Venture Rewards Credit Card and the Bank of America® Premium Rewards® credit card, are offering these kinds of perks. Bank of America’s $95-annual-fee premium card even offers up to a $100 airline incidental statement credit annually.

Another great example is the Chase Sapphire Preferred Card. At $95 per year, the newly updated card boasts excellent rewards rates (5X points on travel purchased through Chase Ultimate Rewards; 3X points per dollar on dining, select streaming services and online groceries and 2X points on all other travel purchases) and now offers a $50 annual credit on hotel bookings made through the Ultimate Rewards portal. The annual credit alone covers more than half of the annual fee.

Bottom line

Before you apply for an especially pricey card, check to see if the perks you’re most excited about are available on a more affordable version. If you decide to embrace a more expensive card, be sure you’re getting your money’s worth, whether through statement credits, card benefits or higher rewards rates. Once you find a card that can offer you the best value, despite high fees, without having to adjust your spending habits, there’s no reason you shouldn’t go for it.

Ready for a premium rewards card? Check CardMatch to see rewards credit cards tailored to your credit profile without any impact to your credit.