I’ve been asking this question more and more recently. I ran a poll on Twitter quite a while back and most of the people who answered said they weren’t paying for their Credit Cards.
So I decided It was time I crunch some numbers. Having recently figured out that Cash Back was the king (check out the article here), I wanted to find out if the Free Cash Back card was better than the Annual Fee Cash Back card.
I’m going to use my personal card as an example but you can easily switch the numbers here with the ones that apply to you.
Going head-to-head will be 2 MBNA Rewards MasterCard:
- Free, sign-up Bonus of 5,000 reward points ($50), 1% Cash Back on all purchases
- $89/year, sign-up Bonus of 10,000 points ($100), 2% Cash Back on all purchases
I’ve divided the yield in terms of different spending categories, ranging from $500 to $5,000 monthly. Here are the numbers for a 5-year scenario:
The highlighted squares are the ones in which the annual fee card is at a disadvantage compared to the free card. What we immediately see is that in the long run (5 years in this case), the annual fee card is almost always worth it. The only scenarios that makes the Free card worth it, is if you’re a VERY FRUGAL person that only spends $500 monthly. And even then, you’d better keep your card more than 1 year to make it worth it. As long as you are above $1K/month it doesn’t matter what spending category your are in or how long you keep the card.
So there you have it! What cards are you guys using? Does it have a fee? Did you compare it the best available Free/Fee equivalent card?
I give the Credit Cards a lot of importance because they play such a central role in our personal finance lives and as such, we should learn as much as we can about them and find the right one for our personal situation.
Thanks for reading along 🙂
Money Lover, Dividend Growth Investor, Youtuber, and Blogger!