Looking Beyond the Annual Fee

Looking Beyond the Annual Fee

While looking to purchase any new product from a smartphone,  to a vehicle, or even a Credit Card (CC), the inevitable question is: "How much will this thing cost me?". The dreaded annual fee tends to be the most challenging part about recommending and CC consulting for friends and clients. The moment I use my thick, shiny, metal American Express Platinum card out with friends, they want to grab it, hold it, weigh it in their hand. Then almost like clockwork, they inquire "How much is the annual fee?". This age old question is not as simply answered as what is blatantly advertised on the American Express website.

At the Points Passport (PPP), we are all about getting the most value out of our credit cards, flights, hotels, and most importantly our hard earned money. Each and every credit card has an overall expected value. Some cards are obviously better than others, and in many cases the expected value is based on the user's ability to take advantage of all the benefits that are available. Let's break down a few cards so you can see how you shouldn't judge a book by its cover, or CC by its annual fee. The example I will be using is based on a consultation I did for a client, his initial thoughts, and how his mind was changed when he realized the more expensive annual fee had a much greater expected value.

In this example my client, like most people, began their credit card journey with a free card that had minimal benefits. People tend to start off this way and eventually move up to a card that offers more, such as the Chase Sapphire Preferred card (CSP). The CSP is a mid-level card that has a $95 annual fee, which is waived for the first year. For this comparison we are going to look beyond the first year because we are analyzing the annual fee specifically, and not the sign up bonuses. As of November 2018, the CSP has a generous 50,000 point sign up bonus (see below for referral link), earns 2x points back on travel and dining (international) and earns 1x point per dollar on all other purchases. There are no foreign transaction fees, you have some travel and purchase coverage and if you use the Chase Ultimate Rewards Portal for points redemption, Chase boasts you get "25% more value". At a first glance, you can see that the CSP is aiming toward an entry level traveling and dining card, but what are we really getting for that $95 annual fee? The CSP provides no credits for travel, dining, or expected value. My client currently holds this card, and when I mentioned the next card's $250 annual fee, he couldn't fathom spending over 2.5x the amount on an annual fee for another mid-level travel and dining card.

The American Express Gold Card (Amex Gold) is another mid level-credit card. The Amex Gold has a $250 annual fee. As of November 2018, there is a targeted 50,000 Membership Reward (MR) point sign up bonus (see below for referral link) and other perks seen above, as well as it earns 4x points at domestic restaurants and supermarkets, 3x points on flights, and 1x points per dollar spent on all other purchases. There are no foreign transaction fees, a plethora of purchase protection and extended warranty perks. As you can see, like the CSP, the Amex Gold is aiming toward being a mid tier travel and dining card. At this point, my client still was not sold on the extra MR points he would be earning on dining, groceries, and flights, because the "astronomically higher" annual fee. Then I explained to him that the Amex Gold comes with a $120 dining credit (select restaurants) and a $100 airline fee credit.

Annual Fee:    minus      Dining Credit:     minus       Airline Credit:    equals    Expected Value:

 $250                 -                  $120                 -                    $100                =                 $30

His reaction said it all. The fact that he was so focused on the actual annual fee of $250, clouded his ability to see the positive expected value of $220, that is very easily attainable, and is gained by a slightly more initially expensive card. After the Amex credits, the annual fee for the Amex Gold is only $30 compared to the CSP’s $95. This discrepancy is massive without even taking into account the superior point accrual that the Amex Gold has over the CSP. Check back for a more in depth analysis of the newly revamped Amex Gold card in the near future.

My last example is a prime depiction of realizing expected value out of your card, or potential next card. The Starwood Preferred Guest Luxury Card (Amex SPG Lux) is a newly released premium tier American Express card with a hefty looking annual fee of $450! Can you imagine spending $450 on a hotel rewards card? If you stay at an SPG or Marriott hotel at least once a year, I'll show you how. This is a basically free card to add to your quiver. As of November 2018, the Amex SPG Lux offers a generous 75,000 SPG points sign up bonus and has some attractive points earning, if you stay at SPG or Marriott properties or travel often. 6x points at SPG and Marriott hotel's are great and all, but why would anyone pay an astounding $450 annual fee for this seemingly specific card?

As you can see above, the Amex SPG Lux card totes a massive $300 SPG and Marriott statement credit, which brings the actual fee of the card down to only $150, if you use it of course. Next, you earn a free nights stay in a room valued at or under 50,000 SPG points. This free night can be worth between $100-$300 depending on season, properties and locations. So the way you achieve value out of this is up to you, or you can use the Points Passport to help guide you in the right direction. As you can see, without even accounting for the sign up bonus points which would be another free night, or two, after the minimum spend, you would have a positive expected value out of this card.

Hopefully next time you see that annual fee, you don't jump to conclusions and think it is just "too much" to spend on a credit card, but dig deeper and see what that "fee" is paying for, or if you can have the credit card company actually pay you to spend on their card!

Referral Links:

AMERICAN EXPRESS: http://refer.amex.us/ALEXGIUJC?XLINK=MYCP

CHASE: https://www.referyourchasecard.com/6A/PURC936FC8

Referral Link Disclosure: Some of the card links and other products that appear on this website are from companies which the Points Passport will earn a referral bonus.