Credit card rewards have been growing in popularity and generosity over the past several years. There are entire communities online who research different offers to maximize their reward earnings. (Looking at you, NerdWallet!) Sometimes these offers sound too good to be true, and then you find out there is an annual fee attached. Deal breaker?!
Before we start, you must pay off your balance on the card each month and never incur interest charges. That’s a whole topic for another day, but to put it simply, if you carry a balance you will quickly eliminate any benefit gained from the rewards. With that said, let’s assume you always pay your balance and you are looking at a popular card with two options. One has no annual fee and 3% back on groceries, and the other has a $95 annual fee and pays 6% back on groceries.
How can we tell if the annual fee is a deal breaker or if it’s still worth it?
We can easily determine based on your spending habits whether or not it’s worth it to pay the annual fee.
The quickest way to calculate our break even point is to divide the difference in annual fee ($95 – $0 = $95) by the difference in reward percentage (6% – 3% = 3%). The result is $3,166.67, or approximately $61 per week on average.
So what does that mean?
If you spend less than $3,166.67 on groceries annually, you are better off going with the 3% rewards option. However, if you spend more than $3,166.67, you will actually benefit from paying the annual fee and capturing the 6% rewards. We can illustrate the point better by running a scenario analysis in Excel:
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