Best rewards credit cards sometimes come with a fee

For most families, the best rewards credit cards have no annual fee, but there are exceptions. Here's a look at the pros and cons of fees on rewards credit cards.

Damian Dovarganes/AP/FIle
In this 2007 file photo, a traveler uses a Delta SkyMiles credit card to buy an airline e-ticket at the Bob Hope Airport in Burbank, Calif. For many families, no-fee rewards credit cards are a good option. But a select few cards with annual fees, like the American Express Blue Cash Preferred Card, tend to pay for themselves in cash back rewards with frequent use.

With prices on the rise, especially on everyday essentials like groceries and gas, one way to save a little cash is to use a credit cards that offer rewards points on daily purchases. Some of the most generous rewards cards carry annual fees. So is it better to pay the fee and pile up the rewards or go with one of the many free rewards cards?

For most families, a no-fee rewards card (such as the Capital One Cash Rewards, Chase Freedom Visa, or Citi Dividend Platinum Select Visa card) is the best option. With no annual fee, you can be sure that all your rewards will actually be rewards, rather than going to pay back an annual fee.

There are exceptions to this rule, however, especially if you spend thousands of dollars a year on your credit card. A good example is the American Express Blue Cash Preferred Card, which has an annual fee of $75, but gives 3 percent cash back on gas, and a whopping 6 percent cash back on groceries.

To make back that $75 annual fee, all you need to do is spend $1,000 on groceries and $600 on gas in a year – an amount that most families spend in three months. At that pace ($4,000 on groceries and $2,400 on gas a year), you'd make $237 in cash-back rewards annually, even after paying the fee.

Compare that with the popular Chase Freedom Visa rewards card, which carries no annual and offers 5 percent cash-back on gasoline and groceries, but only for select three-month periods. In 2012, the Chase Freedom cardholder at the same rate of spending would have earned back only $152 – $75 less than the American Express card. And with American Express, there's no hassle of having to remember to sign up for the 5 percent bonuses every quarter.

The more you spend, the more the American Express advantage grows. Spend only half as much, however, and the Chase Freedom card is the better deal.

Another instance when paying an annual fee can be well worth it is travel credit cards – cards that pay out points redeemable for high-value rewards like airline tickets and hotel stays.

The average family may not be in the market for this kind of card – they tend to be better for business travelers and other globe-trotting types. But if you do fly frequently, or log many nights in hotels (the two often go hand-in-hand), these cards have unbeatable value, even with an annual fee.

 – Michael Germanovsky is a credit card expert and the editor-in-chief of Credit-Land.com, a credit-card comparison website.

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