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Earning credit card rewards is a great way to offset the cost of purchases you already make. But it's worth calculating just how much those rewards are worth if you have to pay an annual fee on the credit card, or are trying to streamline your rewards strategy to focus on one or two cards that are most valuable for you.
While it may seem easy to dismiss all credit cards that charge an annual fee, many annual-fee credit cards are well worth the price of the fee. The trick is to figure out the value of a card's rewards and benefits for you. When you know how much the card is worth to you, then it can be easier to decide whether to keep it. (See also: How to Decide if an Annual Fee Credit Card Is Worth It for You)
How to calculate the value of rewards
Credit cards offer rewards in the form of points, miles, or cash back. The value of cash-back rewards are the easiest to calculate, and many cash-back credit card issuers list the total cash-back rewards that you've earned during the last year on your statements or elsewhere in your online account.
But it's more complex to calculate the value of the points or miles you've earned. To do so, you need to look at what you've been able to redeem them for in the past, or what you could redeem them for in the future. For example, you could look at the value of merchandise or gift card options available with a particular rewards program. Typically, these options will return a value of one cent per point, or perhaps less.
In particular, merchandise awards often max out at a value of one cent per point or mile, and that's based on the product's full retail price. Since you can often find products discounted in some way, you should base your valuations on the best price that you can find, rather than the full manufacturer's suggested retail price. In fact, even gift cards are often available to buy at below face value.
Next, you should subtract the value of the rewards you could have earned by paying for that purchase on a rewards card, rather than redeeming your points and miles for it.
When it comes to awards you earn with travel rewards credit cards, the process is somewhat similar, but less exact. Usually the best you can do is to get a ballpark figure for the dollar value of points or miles you've cashed in previously. For instance, if you took an award flight to Hawaii in July, 2017, use Expedia or your favorite travel booking site to look up the price of flights in that same class of service in July, 2018. Do the same for any hotel stays you've used rewards for. If you haven't used any travel points yet, you could estimate their value by looking up the dollar price for a flight or hotel stay you'd like to take in the future using those points. (See also: Which Credit Cards Have the Best Travel Redemption Value?)
Again, the next step is to subtract the value of the credit card rewards you could have earned from your credit card, as well as any frequent flyer miles or hotel points that you could have received by paying for your flight or hotel room with a card instead of points or miles.
Estimating the value of your credit card perks
In addition to reward points or miles, many credit cards offer valuable benefits that can also be worth paying an annual fee for. For instance, some airline credit cards offer checked baggage fee waivers that can be very valuable, especially if you're traveling with family. However, they are only valuable to travelers who wouldn't have received that benefit any other way, such as by earning elite status with the airline.
Other valuable benefits may include airport business lounge access, and elite status with hotel or rental car programs, or credit toward elite status with an airline. Also, credit cards may offer travel insurance and purchase protection policies. If you have actually taken advantage of those perks, then you can add the estimated value of those benefits into your calculation. For instance, you could look up the price of travel insurance you would have had to pay for if you hadn't had the credit card perk.
Finally, many premium travel reward credit cards now come with annual statement credits toward travel reservations, airline fees, and the application fees for Global Entry and TSA Precheck. It's fairly easy to add up the value of these benefits and include them in your calculation. (See also: Travel Perks You Didn't Know Your Credit Card Had)
Figuring out how much the credit card is worth
Once you have an accurate estimate of the value of a card's rewards and benefits, then you can subtract that amount from its annual fee to determine its net benefit to you. However, just because the card's benefits outweigh its annual fee, doesn't mean that the card is worth keeping. You have to judge the card based on its net benefits compared to the value of a similar card that doesn't have an annual fee, as well as other competing cards that do have annual fees.
Finally, you have to look at how you use the card. If you're in the habit of carrying a balance on your card, then you are paying interest charges each month. In that case, your first priority should be to pay off your debt and avoid interest charges. Forget about earning rewards until that's done.
To save money on interest charges while paying off your debt, you can use a card that doesn't offer rewards, which will almost always have a lower interest rate than similar cards that have rewards. You might even want to transfer your balance to a card with a promotional 0% balance transfer APR.
When you take the time to calculate all of the costs and benefits of your reward cards, then you can decide if the card is worth keeping and where it fits into your overall rewards-earning strategy.
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