Q. - Is it worth the money to pay an annual fee for a premium credit card?

A. - Credit card companies have developed card offerings that target specific types of consumers to boost their profits. For these card users, they offer cards with hefty annual fees for the privilege of being part of this elite group. For a not insignificant percentage of cardholders, about 30%, called “transactors,” they don’t carry a balance and pay no interest on the card. So, the card companies had to find a way to earn more money from them, leading to the creation of the exclusive membership fee. However, the most profitable customers for the card companies are those who maintain a “significant” balance, never paying it off and never defaulting. Besides earning money from interest or fees when carrying a balance, they realized they could make even more with an annual fee, since we all want to be part of that elite Gold or Platinum group. With any membership scheme, the question is: does being a member offer better prices or benefits, or just the “exclusivity” of holding the card?

The fees for premium credit cards are similar to other membership fees. Pay the fee, enjoy the perks, and it will likely be worth it if you spend at least X (a large amount). For example, a boost to frequent flyer miles depends on spending levels you reach. These cards are designed for the credit card company to earn more money than an average no-fee card. How? Because many will pay the fee but not claim or earn the perks that offset the cost. For instance, an airline card offers a free companion ticket annually for a $350 annual fee. Since many round-trip flights exceed $400, it seems like a good deal. If only 7 out of 10 redeem a flight costing $400, the credit card makes a big profit—the 27% profit on the companion. However, they probably also get some people to redeem the free flight who wouldn’t have traveled otherwise. That’s a win for the airline that sponsors the card. Plus, there might be other perks like shopping discounts, mileage bonuses, email offers, etc., that cardholders total in their mind to justify paying $350 a year to be a Gold or Platinum member, because who would settle for less?

And like other membership fees, the fee reels you in to keep you from switching to the competition. You’ll probably stay loyal because you justify the value of the perks in your head, even if you don’t use the free ticket. Plus, who has the time to search for a better credit card offer with a lower fee?

The money trap with annual fee credit cards is that you often don’t fully use the perks, or if you do, they aren’t as valuable as they seem (it’s the old trick—offering something with a retail price of $100 that actually costs only $40). Remember, the main purpose of the card is to serve as a payment method that offers a short-term interest-free loan if you pay off the balance on time. Whether it’s Gold, Platinum, or not, it doesn’t matter; the card operates the same. If you do use many of the perks, it can be financially justified each year, if you’re not overspending just to get the perks. You’re not really gaining a free ticket every year if you don’t use it. Taking advantage of it in only 7 out of 10 years, you’re giving the airline a 27% profit (I’ve been guilty of this in the past, I admit). Therefore, evaluate if you’re not redeeming the perks to make paying the annual fee worthwhile, since there are plenty of no-fee credit cards that perform all the same functions of the credit card at less cost.