How to decide whether to keep a credit card with an annual fee

Lounge lights

I mentioned that there is only one reason to keep a credit card that carries an annual fee: The benefits you get from holding the card that you would have paid for anyway must be greater than the annual fee.

Let’s take this (strong) statement piece by piece.

Get more value

For a card with an annual fee, you must get at least the annual fee’s worth in value from it each and every year. Not just here and there. It must be all but assured that you’re getting that amount of value without trying.

Why without trying? Because if you have to keep track of it to make sure, it’s probably pretty close. And that’s a lot of effort for not a lot of benefit. I mean, you could create a spreadsheet that shows the amount of value you’ve netted for the card in a given year, but don’t you have enough things to keep track of? Save that effort for the important things.

I’d argue in fact that you must get much more than the value of the card in order to make it worthwhile. If you net $80 in value from a $75 card, you’ve made $5. Is that really worth it?

I know it’s arbitrary, but given all the liabilities (financially and ethically) involved in holding on to a credit card, I’d argue that you want to be getting at least two times the annual fee in value. At the very least. So if you have a $75 annual fee card, if you aren’t getting at least $150 in value from the card each year, I’d say cancel it.

Would you have paid for that?

But you also need to get value out of the card that you would have paid for regardless. This is the kicker that make makes travel hacking bloggers lots of money and can screw you royally.

Take airline lounge access for example, which is a common benefit extended to those who have the more spendy credit cards (the ones with annual fees of $400 or more). I purchased lounge access a few years back (actually, it the was the same week that I launched this blog). It cost me $300, and was a total extravagance, I grant, but I had the money and was curious about what lounge access was like, so I took the plunge.

It was awesome. To be able to walk from a crowded airline terminal into the calm environs of a lounge and have food and drink at my disposal, not to mention abundant power outlets and free WiFi, was very satisfying. I also used my lounge access overseas to be able to take a shower in an airport, which I can’t even describe how satisfying that was.

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Lufthansa First Class lounge
Lufthansa First Class lounge in Frankfurt – from Wikipedia

But was it worth $300 a year? No.

I tend to get to airports right before my flight, and my layovers aren’t usually that long. Even while I had lounge access, I found I had to get to airports early to utilize its benefits, which was kind of silly. It was great, but it wasn’t $300 great.

So after a year, I let my membership lapse.

Now, if someone gave me lounge access for its going price, it wouldn’t be a good value for me, because I wouldn’t have otherwise paid for it.

If that’s not clear enough, here’s a larger example. If someone gave me a Tesla Model S for $50,000, $20,000 less than its base price, would that be a good deal for me? No it wouldn’t, because I’d never spend $50,000 on a car, magical space car or no.

Tesla Model S
It doesn’t matter how cool it is, I’m still not going to buy it for $50,000.

So when you consider all the benefits you get from holding a credit card, the question you want to ask is: “Would I have purchased those benefits if I didn’t have the credit card?

If no, then the benefits aren’t worth it. No matter the price.

Do you know how much value you get?

I believe that people hold on to credit cards and use them without any clear understanding of how much value they are getting from them. This is especially true of people who blindly put all of their spending on a credit card. “But I’m earning miles!” is the standard refrain. But, how many miles are you earning? How much money are you netting? Is it worth the cost?

Regardless of whether it’s a good idea to put your everyday spending on a credit card, chances are in most cases, keeping a credit card with an annual fee isn’t a good deal for you.

But enough about me. Do you keep a credit card with an annual fee? How do you make the math work?

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