March 2, 2014

How to Manage Credit Cards with Annual Fees

Over the last few weeks, several readers (Matt & Ryan - this one is for you) have asked me the same question around managing credit cards with annual fees.  I've promised each of them that I would write a post on my strategy.  Because credit card sign-up bonuses fuel the majority of my points and miles stash, it's important to have a carefully thought out strategy when it comes to managing fees or the costs could add up quick...reducing the overall "value" of playing this game.  This is a bit lengthy and dense so please let me know if you have any questions.

I separate credit cards (not counting debit cards tied to a checking account) into three categories:
  1. Cards that don't have an annual fee ever
  2. Cards that have an annual fee but the first year is waived
  3. Cards that have an annual fee and the first year is not waived
I have a different approach for each category:

1)  Cards that don't have an annual fee ever

This is the easy part.  Cards that don't carry a fee (such as the Hilton HHonors Card from American Express) should be kept in your sock drawer (or wherever you keep your cards).  This helps build your credit (having credit for a long period of time) score.  Every year or so, I will use this cards to reload my Starbucks card to ensure the card states active.  But other than that, these cards don't get used once I've received the initial sign-up bonus.

2)  Cards that have an annual fee but the first year is waived

There are many great examples in this category.  The Chase Sapphire Preferred and Starwood Amex are two that come to mind.  The first year is a no-brainer.  You spend as you normally would to receive the sign-up bonus and then have to make a decision at your one-year anniversary.  There are several annual fee cards that I keep year after year.  The Starwood Amex is one of them for a couple of reasons  First, I've had the card for 10 years and keeping that long standing line on my credit report is key to maintaining a solid credit score.  Second, the card provides credit towards Platinum elite status which I highly value.  So it's a great use of $65 per year for me.

For the other cards, I will call customer service a month prior to the one-year anniversary (approval dates is something I track on my spreadsheet) and ask for a retention bonus.  This is super easy...takes maybe 5 minutes per card and I've had good luck threatening to cancel the card and either receiving another year free or bonus points that out way the value of the annual fee.  Last year, American Express offered me 25,000 membership rewards to keep my Gold card opened for another year.  I gladly paid the $175 annual fee for those points that I value at around $500.

If the issuer won't offer me a retention bonus, then I will go ahead and cancel.  If I have to cancel, I always ask that my credit line be moved to another card that I carry with the issuer.  This helps preserve your credit line with each bank and is helpful in the future if you ever need to move credit around (this happens often) to get a new card opened.

3)  Cards that have an annual fee but the first year is not waived

This is the tricky part.  I try to steer clear of cards with an annual fee during the first year but sometimes there's an offer (such as the AA Exec 100,000 Mile Bonus) that is just too good to pass up.  In this case, I'm paying a $450 annual fee upfront (reduced to $250 with $200 in statement credits) for 100,000 miles that I value at $2,000.  So for me, the return is fantastic and I'll use the miles for an international first class ticket worth (at retail) around $10,000.  I will ask for a retention bonus at the one-year mark and if there isn't one, I'll go ahead and cancel the card.

Last year, I spent about $700 on credit card annual fees.  For that spend, I received well over 200,000 bonus points and miles that I value at over $4,000.  So the ROI on the $700 is pretty good.  During the first year of organized "card churning" my spend on annual fees was <$100.  And I earned over 1,000,000 points and miles!  But there are only so many cards and it gets harder and harder over time.  If you are just getting started, there are so many fee free cards that this won't be an issue for at least a year.

Hopefully this overview answers some of your questions.  If you have a specific travel goal in mind, even if you have to spend a few hundred bucks on annual fees, you'll most likely come out ahead vs. paying for your trip with cash.  


  1. Thanks for the post, Evan. On the retention bonuses - do they offer those based on how much you're spending on the card, or can you get those bonuses on cards you don't use heavily?

  2. @ Matt Rushing typically it's based on spending but if you get the card to get a bonus (say spend $3K in 90 days) then you'll have put some spend on the card no matter what. I've definitely received a retention bonus after barely spending on the card. From a CPA perspective, it's way cheaper for the issuers to give you a $95 fee waived then to go out and get a new card member.