There is a lot of benefit to signing up for cards that have annual fees. For example, the US Airways Mastercard (RIP) offered 40k miles on first purchase and payment of an $89 annual fee. Plenty of other cards waive the annual fee (Chase Sapphire Preferred, Amex Starwood Preferred Guest, etc) AND provide you a gigantic sign-up bonus. But when it comes time for you to renew the card (and pay the annual fee) what should you do? Should you keep the card?

The break-even point

Where credit card issuers trick us is in getting us to count the sign-up bonus as part of the card’s value proposition beyond the first year. For example, consider the case of the CapitalOne Venture card. It comes with a 40k point sign-up bonus worth $400 with an annual fee of $59. Should we keep the Venture card for a second year, or downgrade to it’s little sibling, the VentureOne card? Here’s the math:

$59 annual fee / 0.75% extra cash back per dollar spend = $7,867

What that means is if you plan on putting more than $7867 spend on your card, it’s worth it to pay the annual fee to keep the Venture card over the VentureOne.

Wait. What about your $400? Remember that the money is already in your pocket, whether you keep the card another year or not. It therefore should play no role in your decision of whether or not to keep the card.

What if instead you considered replacing it with a 2% cash back card with no annual fee like the Fidelity Amex or Citi Double Cash rather than the VentureOne? Intuitively, your break-even point will be higher, but here’s how the numbers work out:

$59 annual fee / 0% = infinity

So yeah. You’ll never make up the annual fee.

And the Barclaycard Arrival (which bloggers tout as one of the best fixed-value cards out there)? It offers not 2%, but 2.105% cash back when redeeming for travel, and it’s sign-up bonus of 40k points is worth $421 to the Venture card’s $400. Comparing it to the Double Cash or Fidelity Amex:

$89 annual fee / 0.105% extra cash back per dollar spent = $84,761 spend to break even.

To put that into perspective, $84,761 is more money than many households make in a year, forgetting even the fact that people split their spend across multiple cards. Add that to the fact that you can only redeem Arrival points for purchases of $100 or more, and you have a clear winner.

The general case

In general, when deciding between an no-annual fee card and a card with an annual fee (or any two cards, for that matter), you want to consider the following:

Difference in annual fee : Fee for card A - Fee for card B
Difference in earnings : Earnings rate of card A - Earnings rate of card B
Break-even spending: Difference in annual fee / Difference in earnings * 100

A few notes

You might value points for the different cards differently. In that case, the earnings rate is just the value per point (more on that later) * points earned per dollar.

For cards with category bonuses, just take the average earnings rate for a given set of spend, e.g. for a card like the Chase Freedom, maybe you have 75% category bonus spend and 25% general spend, so your earnings rate would be 0.75 * 5% + .25 * 1% =  4%. Typically I only ever use cards with category spend for purchases in the category (with all my non-category spend on a 2% cash back card), so I don’t ever have to do this math.


So, should you get the Amex Everyday Preferred card ($95 AF) over it’s little sibling? To keep things simple, let’s only focus on the highest earning category, groceries, and let’s value Membership Rewards points at 1.5 cents / point. Assume also that we hit the transaction bonuses in each case. The Preferred card earns 4.5 points per dollar spent whereas the normal Everyday card earns 2.4 points. Where do we break even?

[$95 annual fee / (1.5 * (4.5 - 2.4))] * 100 = $3015

So in most cases, yes. If you only hit the transaction bonuses every other month, for example, the earnings difference decreases and the break-even point will go up. And for what it’s worth, now you know how to factor in category limits when deciding between cards. If the 4.5 points per dollar had been limited to the first $3000 in spending, then it would never have been a good idea to get the Preferred card since you could never recoup the annual fee.


Retention bonuses: the math is pretty straightforward; does the bonus exceed the cost of the annual fee?

Bank points cards with transfers: With the Chase Sapphire Preferred, for example, you lose the ability to transfer your points. If you have a significant stash of points left, it may make sense to bite the bullet and pay the fee so you can transfer later. Or just cash out the points as a statement credit if you’re not going to get more than the annual fee in value from redeeming the points (e.g. if you have less than 5k points).

Co-branded cards: the equation is a bit trickier but can still be relevant if you can put monetary values on the various perks. E.g. how many times will you use a free checked bag? For a lot of my trips, I only travel with carry-ons, so something like this isn’t worth it to me. As a rule of thumb, if I wouldn’t have otherwise paid for a perk (e.g. lounge access), I value it at $0 rather than some percentage of its actual cost.

Obviously, this list isn’t exhaustive, and there are plenty of other reasons to keep your card, so many that I’m not going to try to enumerate them. The point is that I encourage you to think more critically when sitting down with a pile of cards up for renewal. Hope this is helpful!