Monday, February 11, 2008

To Fee Or Not To Fee? That Is The Question.

I recently read that about 70% of all credit cards do not carry annual fees. Whether or not that’s true, I have no idea. But let’s assume it is. If that’s the case, it’s quite a departure from the days of old when just about every credit card out there carried an annual fee. I imagine that savvy marketers gained a competitive edge by being able to advertise “No Annual Fee”, underwriters found new ways to make up for the quick buck and eventually, I suppose, the laws of Malcom Gladwell’s “The Tipping Point” took charge and most banks followed suit.

But what about the remaining 30%? In a world where annual fees appear to be optional, why would anyone in their right mind stick with a card that continues to stick it to them right back? Well, for many, they sadly just don’t know any better and probably haven’t done their shopping. But for others, the annual fee can be a friend, bringing lower rates, better rewards and more earning power.

You’d think that a guy who knows a thing or two about credit cards wouldn’t use one that carries an annual fee. But, guess what my dear school of fish - I do. And I’m proud of it - because it makes financial sense. Here’s why:

As you know from previous posts, my card of choice belongs to a big hotel chain and a major bank. That big hotel chain has two credit card products. One that earns users 3 points per dollar with every stay at said hotel chain’s properties. This “basic” card carries no annual fee. The other (the one I have) carries an annual fee of $65. For that $65, I earn all this:

  • 5 points per dollar with every stay at the hotel chain’s properties instead of 3
  • A certificate for a “free” night’s stay upon every account anniversary
  • Double points on airfare, dining and rental car purchases
  • A 15-night credit towards their Gold member status (which requires 50 nights stay per year, so in other words, I only need to stay 35 nights to reach Gold status).

Of course, the $65 annual fee is automatically worth it since it gives me a free night’s stay. But even if it didn’t it would still be worth it to me because I’m a heavy user. From my hotel stays alone I rack up about $6,000 in charges a year with the hotel chain. On the basic card, that would earn me 18,000 points. But on the premium fee-based card, it earns me 30,000 points. The difference of 12,000 points is enough for one night’s stay at one of their mid-tier locations – the equivalent of about $150. Plus with my airfare, dining and car rental bonuses, I’m well on my way to a second free night. So, you can see, I can easily justify paying the annual fee.

But enough about me. What about the average Joe who revolves a balance and is paying 14.99% on a card with a $7,500 limit? Does an annual fee of $50 make sense? Let’s see…

If Joe uses runs through his limit in a given year, his $50 annual fee is the equivalent to tacking on 0.67% in interest ($50/$7,500). So, his 14.99% APR really becomes 15.66%. Joe has to simply ask himself (or prospective creditors) whether or not he can get a card with a $7,500 limit and an APR of less than 15.66% all with no annual fee. If Joe can, Joe should. But if he cannot, then he should sleep soundly knowing that in his case, life with an annual fee is as good as it’s going to get.

It always comes down to the basic rule I’ve preached before and will preach again: Do the math! If you’re no good at math, have someone do it for you. And if you don’t know anybody that’s good at math, we feel for you. Your life isn’t easy. If that’s the case, just give us a shout here at Cardfish.blogspot.com. We can help. And the best part is, there’s never an annual fee!

Until next time,

CardTuna

2 comments:

Anonymous said...

You are so right. You have to do the math. I had a choice ; no fee or fee . I chose fee because they bundled 15,000 miles plus a companion pass coupon with the fee, $69. That sounded like a deal. But now they say if I transfer balances in the first thirty days I can earn another 10,000 miles. The catch is the transfer balance fee is 3% and the reward is 1 mile per $1 transferred. The math - to get 10,000 miles I must transfer balances of $10,000 which will cost me 3% = .03 x $10000 = $300 - THEY MUST BE KIDDING. I did the math - they can keep their balance transfer offer!

Thanks, Cardtuna.

CardTuna said...

Thanks Anonymous.

I urge you to check the terms and conditions of your transfer. Many programs will impose a fee of 3% UP TO a certain dollar amount, like $75 or $100. So, in the end, transferring a balance can be a good deal, especially if they limit the fee, and more importantly if they're giving you a 0% APR. If that's the case, make sure you ask yourself what you'd be paying in interest on the $10,000 if you DON'T transfer. It may be well worth your effort after all, and get you a free ticket to boot!

CardTuna