Credit Cards With Annual Fees: How to Make Them Work for You

If you have a credit card with an annual fee, you've probably noticed something -- these fees aren't cheap. Some are around $100 a year, but it isn't uncommon to find some that are north of $400 and $500.

That means from the moment you get a credit card with an annual fee, if you really want to make the most of the card, you need to think about how to use it. After all, if you're going to spend $300 annually on a credit card, but you only get $200 in rewards points or cash back in a year's time, nobody's going to call you a financial whiz.

If you're thinking of applying for a credit card with an annual fee attached, you'll want to keep several things in mind.

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Don't get a card with an annual fee if this is your first credit card. Why? You need to think about your credit history, says Liran Amrany, co-founder and CEO of Debitize.com, a website that lets people use their credit cards so they work like debit cards.

Amrany says that because 15 percent of your credit score is based on the length of your credit history, you'd be better off without an annual fee.

"Even if you think a rewards card with an annual fee is worth the fee today, that might change in the future, and then you'll be left either canceling the card and hurting your credit score -- or paying an annual fee for a card you no longer want," he says.

Not that everyone necessarily should keep the first credit card they get forever, but for the purposes of showing lenders that you've been responsible with your first credit card for oh-so-many years, it can be worthwhile to hang onto it.

Don't try to do it all. Michael Parrish DuDell, the Chief Strategy Officer at CouponFollow.com, a coupon code website, says that he has tried and tested 10 consumer and business cards and recommends deciding from the onset which benefit is the most important to you -- points, miles or cash back.

"Most consumers try to tackle all three, which is almost always a mistake," he says.

Why? Generally, it's simply easier for most consumers to shoot for one benefit than multiple ones, according to DuDell.

"At the beginning, they try to take advantage of each incentive but quickly lose steam and end up missing out on key features. For example, double points in specific categories. Instead of trying to find a card that does everything, it's better to pick the card that's right for your specific lifestyle," he says. "For most consumers that usually means choosing a card that offers competitive cash back or points."

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DuDell recommends comparing cards to see which one offers the most bang for your buck on either points, miles or cash back and then applying for the card and going with that strategy.

He actually has three credit cards with annual fees, costing him $1,100 a year. It's a lot, he concedes, but collectively they offer various credits and rewards points worth far more, so DuDell has no problem paying those fees. Most of his perks, like discounts with hotels and car rentals, and the points he collects are related to travel.

"This is important to me since I spend almost half the year on the road," he says.

Study the fine print. There's a reason credit cards have hefty annual fees. They're offering substantial rewards, and the issuers want some of their money back, to offset that. It probably also doesn't hurt the credit card issuer any when consumers don't utilize their rewards and just wind up paying that annual fee, year after year.

So look at that fine print and compare it to the fine print of other credit cards with an annual fee, suggests Chris Mettler, founder and president of CompareCards.com, a credit card comparison website.

"People might be attracted to a big sign-up bonus, but if the card doesn't match their spending patterns, a big sign-up bonus may not be worth a hefty annual fee," Mettler says.

For instance, he explains, "If the card offers triple points for travel, but you don't spend a lot on travel, it may not be the best card for you or worth the annual fee."

But you'll also want to make sure that there aren't fees you have to pay to get the rewards. This is rare, but occasionally a perk will actually cost you money to get, or there will be some sort of hoop you have to jump through in order to redeem points. And, of course, you may simply realize that the amenities being offered are great -- for someone else. Or maybe you'll realize that the rewards rotate throughout the year, and while you love the cash back for the groceries that you'll buy, the cash back for the gas will be useless since you live in the city and only use public transportation.

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So run some numbers. Let's say that you're thinking of applying for a credit card with a $300 annual fee, and the big selling point is that you'll get 5 percent cash back on your groceries. And let's say that you spend approximately $600 a month on food. Five percent cash back translates to $30 a month. After a full year, you receive $360. You can certainly justify getting the card, but after accounting for the annual fee, you've only made $60. It isn't exactly a windfall.

But maybe you have a spouse and a couple kids, and your food bill is more like $1,200 a month. So that 5 percent translates to $60 cash back a month. After a year that's $720 cash back. After the $300 annual fee, that's $420 left over. Suddenly, the annual fee is looking more attractive, especially if there are other perks that are associated with the card.