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Evaluating Annual Fees And Calculating Effective Annual Fees

One thing I’ve seen comments on or people talk about is effective annual fee. Now I’ve always believed the annual fee is the annual fee. That is the money that comes from my bank account to pay for that credit card.

Banks can give you credits, but many of these credits are ways of you prepaying your own travel or certain expenses.

For example, you pay Chase $450 for your Chase Sapphire Reserve, if you meet their requirements, which are pretty simple, Chase will give you, up to $300 of your money back.

If you don’t well, they keep your money.

I remember people applying for the Chase Sapphire Reserve when it was the 100,000 point offer and people who didn’t travel were opening this card. Which sounds weird, right, but they felt they had booking trips to use this credit. Essentially costing them more money, but since they had a credit, they had to use it.

Even with these credits, these aren’t always as simple as subtracting this out from the annual fee and saying this is your effective annual fee. That is too general of a calculation and I don’t believe it to be true in many cases.

I think there are really 3 ways you can classify these credits or cards with different credits.

1. Purchase you don’t typically make, but will because of the credit

2. Purchases you make anyways, shifting the spending and the bank pays part of the cost

3. Have credits from credit cards you won’t use

All of these will factor into your own effective annual fee.

Value of Airline or Hotel Resort Credits:

Something I often see is people will calculate these credits at 100% cash value when I really think it is more like 80 to 85% cash value. The reason being if you had $100 in your hand right now, would you go buy a $100 AA gift card? Absolutely not.

Although that is pretty much how credits like the American Express airline credits work. You give me money and I will return it to you in the form of a gift card, well for Delta, or Southwest.

But if you had $100 and you could buy a $110 AA gift card, would you do it? Yes you would. So if you aren’t willing to spend your money at a $1 to $1, then I don't feel you can calculate credits at 100% of their value.

A good example would be, if you had an Amex offer for 10% off at Staples, you could purchase $500 Southwest gift cards. By using your Blue Business Plus you would earn 1,000 Membership Reward points worth about $15.

And if you used the Chase Shopping portal you could earn 2 points per dollar, so you would earn 1,000 Ultimate Reward Points. Now this is a YMMV situation since for some people gift cards don’t trigger the portal bonus. I personally haven’t had an issue.

If you value Ultimate Reward points at 1.8 cents per points. You’d earn about $18 in value.

Even if you calculated the Amex points and Chase points at 1 cent per point you would still receive $20 back, instead of the point values I just gave.

Stacking this altogether, you would get $50 from the Amex offer, about $15 in Membership Rewards, and potentially $18 in Ultimate Rewards. By stacking these together you are paying about 83% of the cost, giving you a 17% discount. And for that reason I don’t believe you can count travel credits as a 100% cash equivalent

At the 1 cent per point calculation it would still save 14% overall on that purchase.

So let’s take a look at these credits.

Purchases You Were Planning To Make Anyways:

This is where I agree you could subtract the credits from your annual fee.

In this fashion, instead of you paying the merchant directly, you pay the bank and the bank pays the merchant and you receive extra benefits. This is where you might receive the most value from your money. But this is where I think most people calculate their credits when it comes to their annual fees, which I think is inaccurate.

For example, I like to travel, hence the reason for my YouTube Channel. So if I had the Chase Sapphire Reserve and was booking an award flight. I was going to have to pay the taxes and fees anyways, so by booking on my Sapphire Reserve, I essentially pay the taxes and fees anyway by paying Chase who reimburses me the taxes and fees. Plus I get all the extra benefits of the Sapphire Reserve.

If you aren’t someone who travels and have this card, then you would fall into the next section.

Purchases You Make Because Of The Credit:

I think this one actually gets me worked up the most when I hear people talk about credits.

Just because your credit card offers a credit doesn’t mean you are actually saving money. You could actually be spending more money by using this credit than not having the credit at all. Which is a win for the banks.

Here’s an example, I have never used GrubHub, UberEats, Seemless, or any other delivery service. But my Amex Gold gives me a $10 monthly credit to use for dining at specific restaurants or certain delivery services.

So some will say this calculates to $120 off my annual fee, because of the credit. Since I don’t already use one of these services, this now becomes an added cost to me. And doesn’t actually reduce my annual fee.

If I were to spend $15 per month on a meal using GrubHub, I get to use my credit and it only cost me $5. Win! Wrong!

I would actually spend $180 per year, $120 of which would be shifted if you will from me paying directly to it coming from American Express, which helps, but I still have spent an extra $60, which is $60 more than I personally spend on GrubHub now. So in the end I spent more money and if you calculate annual fees by subtracting the credit, it then becomes $250- $120 + $60 = $190.

No one wants to explain this as an added cost, only the fact you “save” $120 due to the credits.

The only situation this would subtract out exactly is if you only spent $10 each month. If you spend less than $10 then you actually aren’t maximizing the credit entirely and if you go over then you’re potentially spending more money.

Subtracting Credits You Aren't Going To Use:

Some of these premium credit cards offer great benefits and credits at certain hotels or programs. But unless you use these programs or stay at particular hotels or resorts these credits mean absolutely nothing to you.

For example, the Hilton Aspire credit card offers a $250 resort credit at participating Hilton resorts. While this is great, I can’t remember the last time I actually paid for a hotel stay, let alone stay at a Hilton Resort. So I am not going to go out of my way to pay for a hotel or use extra points stay just to use this credit.

So in the big picture this benefit has little to no value to me. So I really can’t subtract $250 from my annual fee because I am not going to be using this benefit to begin with. And if I did, I could potentially spend more money, right?

And if you did adjust your travel patterns to use this credit you are then going back into the purchases you don’t normally make but do because of the credit category. Which again could be costing you more money.


At the end of the day, we pay the banks a fee for their cards, to receive positive value from them. And banks aren’t giving out benefits to which they overall lose money on. If they are, they find a way to "enhance" the benefits.

I really believe these credits are a form or prepaying our own credits or travel. Which you might be paying anyways, so this just shifts spending and you enjoy the benefits.

Strictly subtracting the credits listed by banks is not an effective way to really calculate your “effective” annual fee. Since I think there is more that goes into these calculations than the number the banks are giving you for a credit.

And if you flip through different forums you’ll see many of these credits go unused or not completely used up. Hopefully all of you use your credits to extract the max value from your credit card benefits.

So Tell me, do you calculate an effective annual fee?

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