The Pros and Cons of Premium Credit Cards
Premium credit cards come with rewards and perks -- but also hefty annual fees. So, if you decide to carry one, it's important to treat it like an investment. Here's what you should know about owning a premium credit card.
What Is a Premium Credit Card?
The opportunity to earn better-than-average rewards -- particularly for travel-related purchases -- and obtain benefits such as travel credits and airport lounge access is the primary difference between premium credit cards and more basic credit cards. Rewards, such as free or discounted flights and hotel rooms, make premium cards worthwhile for users. For example, The Platinum Card from American Express earns five points per dollar on flights booked directly with airlines or American Express Travel, and on prepaid hotels booked on amextravel.com.
"The reason these cards are out there is to engage high spenders in a way that is unique and provides value that goes beyond the reward structure," says Justin Zeidman, manager of credit card products at Navy Federal Credit Union.
Most premium cards have an annual fee -- some are $500 or more -- but cardholders who use them wisely can collect much more in rewards and benefits than they pay in fees.
[Read: Best Rewards Credit Cards.]
Overall Benefits of Premium Credit Cards
Premium credit cards are not passive products. You need to keep track of your rewards and perks so you can take full advantage.
"If you use them properly, they can be one of your best investments," says Brent Wilsey, CEO and president of Wilsey Asset Management in San Diego, who says he earns $10,000 to $15,000 in cash back each year. "You have to take the time to get it right."
Balancing multiple cards, and getting the most out of each one, is a daily task for John J. Vento, certified public accountant, certified financial planner and author of "Financial Independence (Getting to Point X)." His cards offer him bonus rewards on business purchases and travel, including access to airport lounges, where he can get free food and drinks. Vento also takes advantage of cardholder concierge services, which can help him get into Broadway plays and high-demand restaurants.
Premium credit cards can offer value for users through immediate discounts or credits each year or month for certain purchases. For example, a card may offer credits for select airlines and discounts of up to $100 per year at stores such as Saks Fifth Avenue.
Other perks may include:
-- Free checked bags for airlines
-- Insurance for baggage, rental cars, trip delays and cancellations
-- Automatic status levels with airlines or hotels
-- A reimbursement for using ride-hailing services
-- Reimbursement for Global Entry or TSA PreCheck
"If you're aware of what those perks are, and use the appropriate card, you really can save a lot of money in the long run," Vento says. For example, you can save $100 on Global Entry or $85 on TSA PreCheck if your card reimburses your fee.
[Read: Best Cash Back Credit Cards.]
Why Fees and Interest Payments Can Wipe Out Your Reward Earnings
Premium credit cards may offer excellent value for cardholders who can take advantage of rewards and benefits, but they can be costly to maintain if you don't use them to their potential. And if you don't pay off your balance each month, you could offset the value of any rewards you've earned.
In a U.S. News survey, almost half of travel card holders carried a balance during the last year. But even a credit card with a low interest rate of about 13 percent will still charge more in interest than you can earn in rewards.
"Your attitude on these credit cards should be to never carry a balance," Vento says. "If you're using a credit card as a way of borrowing money, it's the surest way to get yourself into financial trouble."
One reason cardholders can get into a financial bind is that they are blinded by the desire to rack up points, Vento says. They spend $1,000 to get $10, even if it may not be worth making the purchases in the first place.
"I could see how some people could feel that way -- commercials advertise it that way," Vento says, recalling a commercial in which a woman insisted to her friends that she pay for lunch so she could earn points. "In the real world, that makes no sense at all."
Know the Real Benefits and Costs of Your Credit Card
Before you spend hundreds of dollars to get an exclusive credit card, do a cost-benefit analysis, factoring in the annual fee and potential benefits. For example, it's not a good idea to build points for an airline or hotel you rarely, if ever, use.
Once you get the card, keep track of what kinds of rewards you might be eligible for and make sure you use them.
Although almost three out of four travel card holders surveyed by U.S. News said they redeemed rewards over the last year, almost half admitted to not taking advantage of benefits such as free checked bags when flying, airline priority boarding, airport lounge access and auto rental insurance.
Of course, if you already get access to some of those benefits from another card, association membership or frequent flyer account, you might not need to spend a large annual fee for a card that only gives you what you already have. A lower-fee rewards card that offers cash back might be enough.
Wilsey recommends asking yourself if you'll be able to use the card's benefits.
[Read: Best Credit Cards with High Credit Limits.]
Who Should -- and Shouldn't -- Use a Premium Credit Card
You'll likely need a strong credit score and high income to qualify for some of the top-shelf credit cards.
Even if you can qualify, these cards might not be a good fit if you only use credit cards for emergencies or major unexpected purchases, Zeidman says. "If you're using your credit card like that, an annual fee card might not be the best."
Premium cards are also a problem if you need to keep a revolving balance. In that case, you ought to look for a card with no annual fee and a low interest rate.
It's worthwhile to calculate the amount you would need to charge on a premium credit card to earn enough value in rewards to absorb the cost of the annual fee, along with the value of benefits you can use. The key, Zeidman says, is to get rewarded for the way you spend.
Vento says, "It's a very personal choice. You can't say one card is better than another -- look at all of them and see which one fits your lifestyle and provides rewards that are the most meaningful to you."
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