Why a credit card with an annual fee is often worth the cost of admission

For many people, the thought of having to pay for the privilege of using a credit card is horrifying — especially when there are so many no-fee cards available. However, a card with a fee is often worth the cost.

Annual-fee credit cards boast great benefits, such as better rewards and perks, the ability to earn points faster, and great sign-up bonuses. And if you spend a lot, the overall rewards you’ll earn from the card with an annual fee will beat the no-fee equivalent everytime.

When it comes to rewards cards, those with an annual fee are almost always a better value than the no-fee version.

A look at no-fee versus fee rewards credit cards

For example, the no-fee BMO Air Miles Mastercard comes with extended warranty and purchase protection, rental car discounts, and a free supplementary card. However, the BMO Air Miles World Elite Mastercard, which has an annual fee of $120, still comes with those benefits, but also includes flight discounts, a roadside assistance program, 24/7 customer service, travel and medical protection, and free airport lounge access (a value of $150) in more than 1,000 cities. If you take advantage of the free airport lounge access alone, the card pays for itself. And, if you apply before October 31, 2019, the $120 annual fee is waived for the first year.

Cards with annual fees also have better sign-up bonuses. When you apply for the BMO Air Miles Mastercard, you can get a welcome offer of up to 800 bonus miles, 400 miles when you make your first purchase, and an additional 400 miles if you spend $1,000 within the first three months.

The BMO Air Miles World Elite Mastercard gives you the opportunity to get up to 3,000 bonus miles — nearly four times as many miles as the no-fee version. You’ll also get 1,000 miles when you make your first purchase and 2,000 miles if you spend $3,000 in the first three months.

Annual-fee credit cards usually have better earn rates, too. With the BMO Air Miles Mastercard, you get two miles for every $20 in spending at participating Air Miles partners, or one mile for every $20 spent everywhere else. But with the BMO Air Miles World Elite Mastercard, you earn one mile for every $10 you spend anywhere.

Let’s use an example to show how much more in points you can get with the fee version of this card. Say you spend $1,250 a month or $15,000 a year. With the no-fee BMO Air Miles Card, that equals 750 miles in a normal year. But if part of that spending was at Air Miles partners, you can earn more. According to Statistics Canada, the average Canadian household spent nearly $6,000 on food purchased from stores in 2017 (the latest data available). So if you spend $6,000 at Air Miles partners and $9,000 everywhere else, you’ll earn 1,050 miles annually.

But if you spend $15,000 a year with the BMO Air Miles World Elite Mastercard, you will earn 1,500 miles a year. Not only will you earn up to twice as many miles as its no-fee counterpart, you’ll get all the great perks and benefits that are worth more than the $120 annual fee.

No-fee versus fee cash-back credit cards

Now, if you’re not into rewards credit cards and instead prefer cash rewards cards like me, the one with the annual fee will also come out on top when you spend more.

Let’s compare another two cards. The Scotia Momentum Visa Infinite card has a $99 annual fee and gives you 4% cash back on gas and groceries, 2% back on drug store purchases and recurring bill payments, and 1% back on everything else. The Scotia Momentum No-Fee Visa, on the other hand, only gives you 1% cash back on gas, groceries, drug store purchases, and recurring bill payments and only 0.5% back on all other purchases.

So, let’s say you spend $15,000 annually ($6,000 on groceries, $2,000 on gas, $1,000 at the drug store, $1,500 on recurring bill payments, and $4,500 on everything else). With the Scotia Momentum Visa Infinite card, you will earn $316 cash back after paying the $99 annual fee. With the no-fee version, you will earn just $127.50 in cash back for the same amount of annual spending.

The Scotia Momentum Visa Infinite card currently has a great sign-up bonus. If you apply by June 30, 2019, the $99 annual fee is waived for the first year. And you will get 10% cash back on all purchases for the first three months (up to $2,000 in total purchases).

The card also comes with various forms of insurance, including travel emergency medical, trip interruption, flight delay, delayed and lost baggage, rental car collision loss/damage, and travel accident insurance as well as purchase security and extended warranty protection, and the ability to save up to 25% on car rentals. Of these features, the no-fee version only has the car rental discount.

The fee version of the card also handily beats out the no-fee competitors. Take for instance the Tangerine Money-Back Credit Card. Assuming you spend the same amount as above and get 2% back on groceries, gas, and recurring bill payments (you need to have a Tangerine savings account in order to get three Money-Back categories; otherwise you can choose only two), and 0.5% on everything else, including drug store purchases, you would earn $217.50 in cash back.

The Tangerine Money-Back card does have extended warranty and purchase assurance coverage, and its cash-back earn rate is higher than the Scotia Momentum No-Fee Visa. Plus, if you apply before July 31, 2019, you can earn 4% cash back in your Money-Back categories for three months. But the Scotia Momentum Visa Infinite card is still better than both these no-fee cards.

When deciding whether to get a credit card with or without an annual fee, look at how much you already spend or could spend and calculate the potential rewards. In most cases, the card with the fee will turn out to be the better choice.