The pros and cons of rewards credit cards

There may be times when a rewards credit card is worth the high annual fee, especially when it comes to the benefits that they can give for everyday purchases or air miles. 

Mike Blake/Reuters
A computer chip is seen on newly issued debit/credit card in this photo illustration taken September 28, 2015. Some rewards cards offer significant perks, like double cash back on grocery store purchases.

With the abundance of rewards credit cards on the market, offering perks and extra benefits ranging from cold hard cash to free flights and hotel stays, it can be difficult figuring out which ones are worth carrying — and which cards can provide the biggest bang for your buck.

When it comes to annual fees and expenses associated with rewards credit cards, the process can become even more perplexing. Some people absolutely refuse to pay an annual fee, no matter what the card offers; others find enough value with certain rewards cards that it outweighs the associated expenses.

If you aren't yet sure whether you should pay for rewards credit cards, here are some things to consider.

How High of an Annual Fee Is Too High?

Annual fees for credit cards range from $0 to nearly $500 per year — and sometimes even more. Though at first glance you may find it ridiculous to spend hundreds of dollars annually just to carry a specific credit card, in most cases, these cards provide valuable flight and travel benefits or cash-back opportunities that can make the cost worth it.

When determining how much of an annual fee is too much, weigh everything the card offers you against that fee. If your particular use of the card barely equals the annual fee or doesn't reach it at all, it may be more cost-efficient to choose a similar card (usually with fewer benefits) that doesn't charge the fee.

When determining how much of an annual fee is too much, weigh everything the card offers you against that fee.

For example, Capital One offers the Venture and VentureOne cards, which both award miles. The VentureOne, however, has no annual fee but only awards 1.25 miles per dollar, while the Venture charges an annual fee of $59 and awards two miles per dollar.

Pay No Annual Fee the First Year and Get a Card Test Run

Many credit cards offer to waive the annual fee the first year to provide an opportunity to give the card a spin. If you aren't quite sure if the card is going to be worth the annual fee, this is an excellent opportunity to test it out for a year. You also get a chance to gauge how much you'll use your card, and whether or not you'll use it enough to earn rewards or bonuses that can help offset the annual fee later.

Consider the Value of Sign-Up Bonuses

Credit card issuers offer a variety of sign-up bonuses intended to attract new cardholders. These bonuses can be worth hundreds of dollars or multiple free flights, and usually require that you meet a specific spending threshold within your first three months of opening the account.

While you can find no-annual-fee cards that offer as much as $200 for signing up, you can also get cards such as the U.S. Bank FlexPerks Travel Rewards Visa Signature Card, which carries a $49 annual fee but offers a bonus worth up to $400 in travel. Both can be valuable bonuses depending on your spending.

Remember APR and Pay Your Balance in Full

When considering any rewards credit card, also factor in the APR (annual percentage rate) and how you will use the card. Rewards cards are notorious for higher APRs that can become costly if you regularly carry a balance.

In order to get the most from any rewards program, sign-up bonus, or card benefit, it's best that you avoid paying interest and pay your balance in full each month. If you consistently pay a high APR and an annual fee, it may be difficult realizing any value in the rewards.

Make the Most of the Rewards Program

One of the most important features to think about when selecting a rewards card is the program itself. If you're considering a credit card that awards grocery store purchases, such as the Blue Cash Everyday Card from American Express, calculate how much you spend annually on groceries, and at gas stations and department stores, to determine if you might benefit more from the annual fee version.

Although the Everyday card requires no annual fee and awards 3% and 2%, respectively, the American Express Blue Cash Preferred Card, which carries a $75 annual fee, doubles the cash back on grocery store purchases to 6% and awards 3% for gasoline and department store purchases. For those planning to use the card often, the Preferred version card could be more valuable, even with the annual fee.

Factor in Extra Card Benefits and Perks

Many of the elite-type cards such as the Citi Prestige, which carries the more extravagant annual fee of $450, are beneficial to their members simply because of the benefits and perks. The Prestige credit card offers hundreds of dollars in travel benefits, ranging from an annual air travel credit of $250 to complimentary access to American Airlines Admirals Club lounges, which can cost $500 per year by itself. For those who frequently travel, the benefits and perks can make the journey more comfortable and could be well worth the annual fee.

Credit card users and various financial gurus stand on both sides of the fence, with solid reasons supporting each. Your credit card choice may take some planning and personal analysis, but remember that your individual circumstances should be the deciding factor in determining how much you pay for a rewards credit card.

This article first appeared at DealNews.

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