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

Vacation in Hawaii for four, just $20. Not possible you say?

I want to tell you about my recent rewards success story. But first, let me explain something. There are a few schools of thought around credit card rewards programs, and here they are:

1) It takes too long to rack up the points and are too much trouble

2) The points are good to have when one wants to get something that one might not otherwise purchase on one’s own

3) Points are another form of currency, to be spent as wisely as any other form of currency

Most rewards cardholders who spend a few hundred bucks a month on their cards likely fall into the first category. That’s because redemptions typically don’t begin until 2,500 points (for which one can usually just get a measly gift card). At a few hundred points a month, it can take years to earn a simple reward.

My pal GridMaster subscribes to the second point of view – racks his points up to buy that splurge item he wouldn’t otherwise consider (see “Watch Your Point Values When You Redeem” below).

But me – I subscribe to the third point of view and look at my points balance as if it were cash, and I weigh my redemption options with the same level of care that I choose to spend my hard-earned coin.

As a result, I recently struck the “deal of a century”. I redeemed 270,000 points from my hotel rewards program for a full week at a category 7 (i.e. top notch) hotel and three tickets (non-stop) to Hawaii.

My rewards program allowed me to take 120,000 points (included in the 270,000 points) and deposit it into the airline frequent flyer program of my choice (this is not typical - usually 120,000 airline miles would cost close to 250,000 miles alone, but my rewards program offered a great hotel/air combo deal). So, I chose the airline account that had a 30,000 mile balance – that gave me 150,000 points – more than enough for 4 round-trip tickets – all I had to pay was $5 a pop for my online booking fee. As a result, I’ve got a full week in Hawaii with airfare for just $20!

I figured this was the best value I could get for my points – here’s how it breaks down:

7 nights at the JW Marriott in Oahu – normal room rate = $440/night including tax. Total value = $3,080. Point cost = 150,000. $ value per point = $0.0205

3 round trip tickets (from points) = $480/ticket, $1,440 total value. Point cost = 120,000. $ value per point = $0.012. I “paid” for one of my tickets from my existing miles account balance.

Total trip value (not including fourth ticket) = $4,520. Total points “spent” = 270,000. Total value per point = $0.0167.

Sure, I could have saved 120,000 points and used them for a future vacation at a higher cash value, but I determined it was better to spend the points now, keep the $1,440 I would have spent on airfare and use it when I get to Hawaii for meals and entertainment.

Consider this – most points programs approximate the value of a point at around $0.01. So, when you “earn” one point per dollar, you’re really getting a rebate of about $0.01.

In reality, it’s probably a little less on average across all points programs. So, when you go to “spend” your points, you can maximize your value if you get more than penny per point value. Or, you can redeem for merchandise, cash back or something else for a value under a penny per point. In the case of GridMaster, he got a $200 surround system for 36,000 points. That’s a value of $0.00556. Not a great exchange, but like he said, he got something he wanted but wouldn’t buy on his own. GridMaster did say he prefers to exchange for cold hard cash, so I’m sure that’s one of his card’s better benefits – hopefully he’s getting a minimum of a 1-to-1 exchange (100 points = $1.00).

In my case, as I mentioned before, I advocate the “combo” programs like the hotels and airlines. They’re a great way to rack up points that much faster. Since I travel frequently, I rack up points at a great clip just by staying at the same hotel chain over and over again. Then, I got their credit card, which earns me extra points with each stay (15 times what I would get with another card), plus the standard 1 point per $ on everything else. The points I earn on my credit card spend get deposited into my hotel loyalty program. So, it took me about 8 months to rack up enough points to turn into a week in Hawaii, airfare included. Not too shabby.

In the end, it boils down to your lifestyle and your appetite for spending. If you’re not a big card spender, don’t take too much time to worry about it because it will take years for you to rack up anything of value. Concentrate instead on the card’s other features such as rate and terms. However, if you are in it for the points – do your homework and squeeze the most out of your rewards, then turn them into something you really want. After all, it’s your money!