Fee vs No-fee Credit Cards

Fee vs no fee credit cards

If you are in the market for a credit card, don't be too quick to dismiss those that charge an annual fee. There are some fee-based cards that offer greater savings than their no annual fee counterparts, even once the annual fee is accounted for. The following is a comparison of three pairs of credit cards - those with annual fees and their no annual fee counterparts - that serve as great test beds to demonstrate this, and if you choose wisely you could get some big savings. This scenario works only if you stick to the golden rule: pay off your card in full every month!

Comparison of Grocery, Gas and Department Store Reward Cards

The first pair of credit cards are aimed towards everyday purchases: groceries, gas, and department stores. These are the American Express Blue Cash Everyday, and the Blue Cash Preferred.

  Annual Fee Sign Up Bonus Cash Back Rates

Blue Cash Everyday

 

Amex Blue Cash Everyday

 

$0 $100 after spending $1000 in the first 3 months
  • 3% at U.S. stand-alone supermarkets (capped at $6000 per year)
  • 2% on gas at U.S. stand-alone gas stations
  • 2% at select department stores
  • 1% all other purchases

Blue Cash Preferred

 

Amex Blue Cash Preferred

 

$75 $150 after spending $1000 in first 3 months
  • 6% at U.S. stand-alone supermarkets (capped at $6000 per year)
  • 3% on gas at U.S. stand-alone gas stations
  • 3% at select department stores
  • 1% all other purchases

American Express recently capped the grocery category. Once you’ve spent $6000 in supermarkets for the year, you’ll earn the base 1% thereafter. Looking at that category alone, you can earn up to $180 over the course of the year up to the cap with the Everyday card. The 2% categories are still uncapped.

The Blue Cash Preferred has an annual fee of $75, but the first two years are paid for with the sign up bonus. Again, the grocery category is capped at $6000. To make up for the annual fee, you’d have to spend only $1250 a year in groceries. That’s just $25 per week! Let’s see what happens when you spend up to the cap of $6000 a year in groceries. At 6% cash back, you’ll get $360 back, or $285 after the annual fee! That’s $105 more than the Everyday card. With the higher earnings in gas and department stores, everything else is just gravy. The Blue Cash Preferred will yield more cash back even after the annual fee if you spend $2500 a year or more on groceries.

Comparison of Travel Reward Cards

Our next pair of cards is aimed at travelers. Here we’re comparing the Capital One VentureOne Rewards, and the Venture Rewards. Both cards are Visa Signature cards, so they both give you the exact same travel benefits. The only differences between these cards are the annual fee, and the rewards rate.

  Annual Fee Sign Up Bonus Ongoing Rewards Rate

VentureOne

 

VentureOne

 

$0 10,000 miles (= $100) after spending $1000 in the first 3 months 1.25 miles per dollar spent (equal to 1.25% of purchases)

Venture Rewards

 

Venture Rewards

 

$59 (waived the first year) 10,000 miles (= $100) after spending $1000 in the first 3 months 2 miles per dollar spent (equal to 2% of purchases)

Your first two years of the annual fee on the Venture Rewards card are taken care of between the first year’s annual fee being waived, and the sign up bonus. But to make up for the annual fee from a spending standpoint, you’d have to spend just shy of $3000 annually, $2950 to be exact. But how much would you need to spend before outpacing the VentureOne? A little under $8000 a year, or $7866.67 to be exact. If you’re going to spend more than this in a year (which is not hard to do if you travel a lot) the Venture Rewards will easily start outpacing the VentureOne. One thing to keep in mind though regarding both of these cards is that you’ll get maximum returns when the miles are redeemed for travel related purchases (i.e. airfare, hotels, and car rentals). Otherwise, the percentages start decreasing.

Our last pair of cards is also aimed at travelers, the Chase Sapphire and the Sapphire Preferred.

  Annual Fee Sign Up Bonus Foreign Exchange Fee Ongoing Rewards Rate Other Notables

Sapphire

 

Chase Sapphire

 

$0 10,000 points (= $100 according to Chase.com) after spending $500 in the first 3 months. 3%
  • 2 points per dollar spent on dining out
  • 1 point on all other purchases
None

Sapphire Preferred

 

Sapphire preferred

 

$95 (waived the first year) 40,000 points after spending $3000 in the first 3 months. 0%
  • 2 points per dollar spent on dining out
  • 2 points per dollar on travel purchases
  • 1 point on all other purchases
  • 7% annual dividend on points earned (whether redeemed or not)
  • Points are worth 20% more when redeemed through Case's Ultimate Rewards travel booking service
  • Points can be transferred to major hotel and airline frequent traveler programs at a 1:1 rate

The Sapphire Preferred comes with an impressive list of extras, but let’s look at actual dollar values to see if the extras are worth the annual fee.

Let’s assume spending $50,000 annually for these two cards. According to the U.S. Bureau of Labor Statistics, the top two quintiles of income earners in the U.S. spend $3206 a year (fourth 20 percent) and $5151 a year (fifth 20 percent) on dining out, and $1459 a year (fourth 20 percent) and $3718 a year (fifth 20 percent) on travel. Let’s average the numbers for dining out and travel just to make fewer calculations. So that’s $4178 a year on dining out and $2588 a year on travel for the top 40 percent of income earners in the U.S. With the Sapphire, this would yield a total of 54,268 points (= $542.68, assuming a $.01 value). With the Sapphire Preferred this exact same spending gives you 73,003 points (= $730.03) after the 7% dividend and after redeeming at the Chase Ultimate Rewards travel booking service. Even if you just take the difference between those two numbers ($730.03-$542.68 = $187.35) you’ve more than made up for the annual fee. With the Sapphire, you’re getting a relatively measly 1.09% ($542.68/$50,000) return on your spending, whereas with the Sapphire Preferred you’re getting a much healthier 1.46% ($730.03/$50,000) return. And with the lack of a foreign exchange fee on the Sapphire Preferred for you international travelers, you can save even more money!

If you plan to apply for a new credit card and the card you’re eyeing has an annual fee, don’t be too quick to dismiss it based solely on the presence of the fee. With the greater rewards rates, sign up bonuses, and potential lack of other notable fees, you might miss out on some big savings.

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