This is episode two – Don’t sweat annual fees! I explain why we should be eager to pay annual fees when we can receive hundreds of dollars in value after slight expenses.
You’re listening to the Hurdy Gurdy Travel Podcast. I’m your host, Justin Vacula with how to travel the world at next to no cost through credit card signup bonuses, perks, and rewards. This is episode two – Don’t sweat annual fees! I explain why we should be eager to pay annual fees when we can receive hundreds of dollars in value after slight expenses.
Some of the best credit cards, particularly those with Chase and American Express, have annual fees ranging from near one hundred to six hundred dollars. Many starting out in the credit card hobby, particularly those who are brand new, from my experience, are hesitant to pay upfront annual fees even when cards easily offer a net gain of more than six hundred dollars in value even after accounting for the annual fee. Here’s how it works: a card issuer will typically charge an annual fee or membership fee on your first billing statement which must be paid even before rewards are available to use. This annual fee, in most situations, posts once again in month 13 of having the card – I’ll talk more about this later.
I think of annual fees as investments over time. Consider the Chase Sapphire Preferred card, one I talked about more in-depth in episode one of this podcast, which charges a $95 dollar annual fee and comes with a 60,000 point signup bonus in October of 2019. In an extremely conservative scenario, we can see that the annual fee is well worth it if we cash out points at a value of 1% or one cent per point and never use other benefits which come with the card. I wouldn’t recommend cashing out and neglecting benefits since redeeming rewards for travel provides more value than a cashing out option, but I use this example to prove a point that the annual fee is well worth it even when cashing out for low value. 64,000 points, a minimum you’ll have after spending $4000 in 90 days to reach the minimum spend requirement, would cash out for $640. $640 minus the annual fee of $95 puts you ahead $545…that’s much more than you’ll get from so many no annual fee cards and certainly more than using the same old same old credit card giving you a few percentage points in return or 0% when using cash or debit. You have to pay to play, but it’s well worth it! Again, we see the extreme value in reaching signup bonuses, so it follows that reaching multiple signup bonuses by getting multiple cards is optimal.
64,000 points for travel, too, gets close to 13 nights at many Hyatt Place or Hyatt House locations. Think: would you be willing to pay $95 for 13 nights at nice hotels with nice complimentary breakfasts? Of course! Sadly, many people not in the credit card game are paying more than $95 for one night at a subpar hotel and coming out dissatisfied – they think they saved money by paying what they see as a low cash rate, but are mistaken. They’re leaving tremendous amounts of value on the table neglecting to sign up for lucrative credit cards. Don’t be that person.
Think about the American Express Hilton Honors business card. Currently, in October of 2019, the card offers 125,000 Hilton points after $3000 in spend across 90 days, Hilton Gold status, and many other perks with an annual fee of $95 dollars. Hilton points are rightly valued around a half a cent per point, so 125,000 points are worth about $625. I often see Hilton properties around 35,000 points per night, so we’re easily at three nights with 125,000 points. We can get more value in booking four nights with points since the fifth night would be free. Stays booked with points also do not assess resort fees and Gold status provides free breakfast each morning for two people at most properties. Further, in October of 2019, you can match Hilton Gold status to Diamond status with Wyndham hotels and then match from Wyndham to Caesar’s Diamond for high status at many casino locations. Even better, if traveling to Atlantic City and even Las Vegas, you can status match more for MGM Gold status and Hard Rock Rock Royalty status in Atlantic City which can give more than $100 in free play, free buffets, and free hotel nights.
I travel to Atlantic City almost every weekend and have been doing so for months. I aim to stay at Harrah’s Atlantic City and enjoy room rates around $25 with no resort fees thanks to Diamond status. Otherwise, room rates can get expensive and, without status, resort fees of around $30 per night are assessed. $95 for all of this is quite a steal! Sign me up for that annual fee! At this point, I don’t yet have the Hilton Honors Business card – I have to wait – and already have Hilton status through other cards, but will still happily pay $95 for more than 120,000 Hilton points even if I plan to only stay at a Hilton property once a year!
When I consider signing up for a card, I think about the expected value I can gain in the first year, subtract the annual fee, and determine whether the card is worth it. I don’t play to break-even, but rather plan to come ahead several hundreds or dollars in value, otherwise I pass and sign up for a better card. I’m more than happy to provide you with guidance to determine which card is right for you. Simply visit the credit card questionnaire on my website at hurdygurdytravelpodcast.com
Let’s talk about annual fees posting for year two. Here, it can be difficult to justify paying the annual fee a second time since we won’t be receiving the signup bonus again. With most issuers, you have 30 days after the annual fee posts in month 13 to make a decision about whether you want to keep the card. You can call asking for an annual fee waiver, downgrade to a no-annual fee card, retention offer (something, typically a bonus or reduction in annual fee to keep the card), or you can cancel your card. In most situations, it’s best to ask for a retention offer or annual fee waiver first, it doesn’t hurt to ask! After this, consider product change options.
Finally, if no product changes are available and you can’t justify paying the annual fee a second time, you cancel the card. I don’t like the cancel option because this could harm your relationship with the bank, especially so if you cancel before 12 months of having the card, hurt your credit score because your average age of accounts goes down, and also harm your credit score because your total lines of credit and/or credit utilization suffers. Try to keep a card or product change. Banks generally frown on you canceling a card before you have it for a year because you appear like someone who was just interested in the signup bonus and do not look like a long-term customer. You don’t have anything to lose, anyway, in keeping the card for at least one year since you already paid for the privilege of having the card for a year. Just be mindful of when the annual fee will post for a second time. Either way, it’s best practice to look at your credit card statements on a regular basis to assure that everything is in good order.
I work with several people and recommend various cards almost never suggesting starting with cards which have the highest of annual fees. Start small, start with one card, and get used to how things work. Again, the Chase Sapphire Preferred has an annual fee of just $95 and many other cards are around the $100 mark. Later on, once you’re more confident, you may opt in to cards with annual fees of $250 to $550 because you’re getting great value – it depends on many factors which is why I don’t recommend cards in a vacuum. I recognize that your situation is, well, your situation. There’s no one best credit card for everyone. I want to consider factors like your travel preferences, geographical location, travel frequency, average monthly expenses, and much more.
Be happy to pay annual fees when the total value of the card, even when considering the annual fee, results in a big win. Most cards with no annual fee lose the competition when compared to annual fee cards – you simply won’t get as much value from no annual-fee cards in most scenarios. Crunch the numbers, figure out the puzzle, optimize, and enjoy the rewards. I’m happy to help you through the process.
When considering a new card, start thinking about the total value you can gain from the card especially considering conservative estimates of point values and benefits. Don’t start from the perspective of only wanting a no annual fee card, instead think of the bigger picture and be willing to make worthwhile investments. Be happy to pay an annual fee if this means hundreds of dollars in value. Pay to play when it’s worthwhile and know that you won’t be forced into paying an annual fee for the second year of holding a card because many options are available.
Thanks for listening and stay tuned for more content!
Visit my website at HurdyGurdyTravelPodcast.com where you can read episode transcripts, complete a free credit card questionnaire to receive tailored recommendations, view helpful resources, listen to my library of episodes, and contact me. Support my work through Patreon, Paypal, the Cash App, and referral links by visiting the donate tab on my website. Subscribe on YouTube; like on Facebook; follow on Twitter; and follow on Instagram.
Visit my other podcast project at stoicsolutionspodcast.com where you can find practical wisdom for everyday life inspired by the ancient philosophers of Greece and Rome.
Thanks to generous patrons and fans of this podcast who help support my work. Have a great day.