Miles and Points 102: annual fees and annual perks

Many credit cards have annual fees.  Some don't, but most do.  Annual fees fall into roughly three categories: free, about $100 and over $400.

The appeal of cards without annual fees is obvious.  They usually have simple reward systems, and can be fairly lucrative.  Some cards give 2% cash back or have bonus categories that can give up to 5% cash back on certain purcahses!  And you don't have to worry about paying an annual fee.  But they usually don't have a very good signup bonus (around $100 value), and sometimes none at all.

So why would anyone pay an annual fee of $100 for a credit card?  What if I told you that the rewards and perks from a card with this annual fee were usually much better, more than enough to offset the annual fee?

Most cards with annual fees around $100 or below waive the fee for the first year.  And they have bigger signup bonuses, usually over $400 value.  At the end of the year you can cancel the card, or pay the annual fee and keep it another year.  You're still way ahead because of the signup bonus.

Usually the cards with annual fees around $100 earn better rewards compared to their no-fee equivalents.

Some cards even give additional rewards every year that make keeping a card forever a no-brainer.

I recently got a Marriott Rewards Visa card.  It has an annual fee of $75 waived for the first year.  I will receive a signup bonus worth almost $550 (after spending $3000 in the first three months) and I also get Silver Elite status in the Marriott Rewards program.  If the signup bonus isn't enough, every year when I pay the $75 annual fee (so starting a year from now), I will receive a free hotel night at a category 1-5 Marriott property that I can use anytime during the year.  Now that isn't good for a property like the Kauai Marriott (that's a category 8) but there are over 2700 category 1-5 hotels just in the US with prices ranging from $67 - $329 (not including tax, which the free night includes).

An even better example is my IHG Rewards Club MasterCard.  IHG (InterContinental Hotel Group) is the parent company of Holiday Inn, and their hotel brands include not only Holiday Inn and Holiday Inn Express, but Crowne Plaza, Staybridge Suites, and InterContinental.  This card has an unusually low $49 annual fee (waived the first year).  I got 60,000 points and a $50 statement credit for signing up (after the spending requirement) and I get Platinum status in the IHG rewards program.  And every year for my annual fee I get one free night in ANY IHG hotel.  Imagine staying at the InterContinental in Paris near the Opera House or the InterContinental Hong Kong, with a spectacular view of Victoria Harbor and Hong Kong Island?  Both hotels cost over $400 including tax.  Does that make a $49 annual fee sound like a good value?

That bring us to the last category of annual fee cards, those with an annual fee over $400.

So why would anyone pay an annual fee of $400 or more for a credit card?  What if I told you that the rewards and perks from a card with this annual fee were usually much better, more than enough to offset the annual fee?

I admit it.  I was shocked when I first heard about credit cards with annual fees of $400 or above.  Who would pay that, I thought.  But people that have these know the perks more than make up for the fees.

A recent example is the Citi Prestige card.  It has a $450 annual fee (NOT waived the first year).  The signup bonus (after spending $3000 in the first three months) is 50,000 ThankYou points (a transferrable currency), valued at $800 or more. And the perks with this card just keep on coming.  There's a $250 airline credit (per calendar year so during the first year of card ownership you can use this twice!), a $100 Global Entry credit, access to American Airlines and Priority Pass airport lounges (up to $399 value), and one truly amazing perk:  book a hotel stay of four nights or longer through the Citi concierge, and you are refunded the cost of the fourth night.  Any hotel.  As often as you like.  No matter the cost of the hotel.

Even if you don't use the lounge access or the Global Entry credit, that's $1300 of value back in the first year, not counting the fourth night free hotel benefit.  Taking the $450 fee into account you still come out at least $850 ahead the first year.  Subsequent years aren't as good with only the $250 airline credit but you still get the lounge access and fourth night hotel benefit, which can add up quickly and easily to exceed the $450 annual fee.

I'm honestly thinking of getting this one myself, although it seems rare that we stay four or more nights at one hotel lately.  Maybe we could if it meant every fourth night was free.

Other cards with fees over $400 are not quite as lucrative.  But again, the perks have to be worth the cost or these cards wouldn't have any takers.

If you play your cards right (pun intended), the annual perks of your credit cards can more than make up for annual fees.

Miles and Points 101: rewards types

There are three major types of reward credit cards. The difference is the type of reward you collect.

1. Cash Back
2. Specific program points
3. Generic transferrable points

The first is a cash back card. You collect money or points and then after you've met a certain threshold (which varies from card to card) you can get either a simple statement credit or redeem points against specific expenses for a statement credit.  The former is easier to understand and I have an American Express Blue Cash card that works like this.  I get a small reward per transaction (usually about 1%) that collects until I earn at least $25.  Then I have the option of redeeming for a statement credit that just reduces my next bill.  Most card issuers also allow purchasing of gift cards and other merchandise but they charge full price for these so I can't figure out why anyone would ever want to do that if they could just get money.

The other type of cash reward card is a little more indirect.  My Barclaycard Arrival+ gives me two points per dollar I spend.  Again I need to reach a certain threshold before I can redeem (10,000 points for new cards these days).  I then have to redeem against travel expenses I've incurred in the previous 120 days.  One point = 1 cent so I would get $100 back.  If I don't have any travel expenses I wait until I have some.  Barclay also gives the option to redeem for statement credit, but this is for suckers: they only give half value for the points in this case (1 point = 1/2 cent).  So I could redeem 10,000 points for $50 or I could wait until I had a travel expense and redeem the same number of points for $100.  Hmm. Who would ever redeem for half value?

The second type of reward cards are specific program cards, like my IHG Rewards Club card that gives me IHG Rewards Club points.  These are often referred to as "co-branded" cards.  Other examples are the United Airlines Explorer card (gives United frequent flyer miles) and the Marriott Rewards card (gives points in Marriott's frequent stay program).  There's no redemption you need to worry about, each month the points you've earned are transferred directly to your account with the specific program and merge with any points you already have there.  Simple, right?  But not very flexible unless you only ever fly on a single airline and stay in a particular brand of hotel.

The third and final type of reward cards are generic transferrable points cards from each issuing bank.  My Chase Sapphire Preferred card is an example of this type of card.  It earns Ultimate Rewards points, which aren't tied to any specific program when you earn them.  When I want to use them, I choose one of Chase's transfer partners (for example, United Airlines, Southwest Airlines, British Airways, Hyatt Hotels, etc.) and transfer my Ultimate Reward points directly over (usually instantaneously).  Which would you rather have, 1000 United frequent flyer miles or 1000 Chase Ultimate Rewards points that could be instantly changed into United frequent flyer miles but could ALSO instantly become Southwest Rapid Reward points, or British Airways Avios, etc..  That's the flexibility with these "transferrable currencies".  Chase isn't the only one that has points like this: American Express has Membership Rewards, and Citibank has ThankYou Rewards.  Each of these generic points programs also allows direct redemption for certain types of expenses (like travel) but is usually not a particularly good value (e.g., Chase Ultimate Rewards points are worth 1.25 cents for travel booked through the Chase web site but typically can be worth far more than that when redeemed as airline miles).  Still, you always have the option.

The different card issuers have different transfer partners.  I can transfer Chase points to United but not American or Delta.  Chase points transfer at 1:1 (one generic point for one specific program point) but other card issuer's generic points can transfer at different ratios.  Some transfer partners are more useful than others and some make for very poor value transfers, because their points are worth much less than 1.25 cents each (the baseline established above).  Chase Ultimate Rewards points can transfer to IHG or Marriott but these points are worth about .7 cents each or just a little more half of 1.25 cents.  I would not recommend transferring Ultimate Rewards points to IHG or Marriott.

Coming up: annual fees and annual perks

Money for Nothing and Points for Free

I never really planned to do much with the points and miles I collected for flying on various airlines and staying in various hotels. I didn't have very much brand loyalty so I never thought I would have enough points in any given program to actually redeem for anything of any value.

Teri traveled to Asia several times in the '90s for work and amassed a fair number of United frequent flyer miles. We did use those to fly to Florida twice, but when those were gone it seemed like that was the end.

Years ago I had applied for a couple of credit cards based on the sign-up bonus alone. First came a Royal Caribbean Visa card that gave a $250 credit on a cruise.  I used that card for several years.  Sadly we haven't taken a cruise on Royal Caribbean since I got the card and most of the points I accumulated have expired.  I also got a Disney Visa card that had a sign-up bonus of $100.  I really thought that was amazing.

I got back into sign-up bonuses almost by accident. In 2014 we had a trip to Europe planned and so I knew I needed a credit card that didn't have a foreign transaction fee. Most credit cards charge a fee of up to 3% for any foreign transaction and why pay that if you don't have to?  I applied for an IHG Hotels MasterCard which didn't charge foreign transaction fees and came with points which I knew I would use in the future.  IHG (InterContinental Hotel Group) includes Holiday Inn, Holiday Inn Express, Crowne Plaza, Staybridge Suites, and InterContinental hotels.

It turned out to be fortuitous that I got that card when I did because shortly thereafter we planned a last-minute trip to Hong Kong. Everything in Hong Kong was expensive so I was glad to have a card without a foreign transaction fee. Later I was reading that in Europe you really need a card with a chip. Back then it was hard to find credit cards in the United States that had chips. My IHG card didn't have one.  I read about a card with a chip called the Chase Sapphire Preferred. I read that in Europe you really wanted a "chip and pin" card (has a chip and uses a pin to complete the transaction) but most cards in the United States (including the Chase Sapphire Preferred) are just chip and signature (card has a chip but you still sign the receipt as is customary in the US). Chip and signature was better than nothing so I went ahead and applied.  Literally a couple of days later I read about a card called the Barclaycard Arrival+ that had just announced chip and pin compatibility. So I got that one too.

Eventually I realized that all three of these credit cards had given me sign-up bonuses valued at over $400 each!  Over $1200 total.  I finally saw how lucrative sign-up bonuses could be.  All I had to do was meet a minimum spending requirement (usually $1000-3000 in three months with spending I would be doing anyway).  Score!

Coming up: different types of rewards.