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Here's Exactly When It's Smart to Pay a $450 Annual Credit Card Fee

If 2016 is any indication of where credit card annual fees are headed, then cardholders may be in for premium fees. The good news is that these fees are typically accompanied by premium perks.

For example, the Chase Sapphire Reserve credit card (read our full review) hit the market in late 2016, offering a laundry list of premium rewards, including 100,000 bonus points (now reduced to 50,000) for qualifying cardholders and lucrative annual travel statement credits. American Express followed suit later on, revamping its slate of perks for the American Express Platinum Card. The annual fee also increased from an already-lofty $450 level to $550.

There is a case to be made for some cardholders to pay a premium annual fee. In the following video segment, Motley Fool analysts Michael Douglass and Nathan Hamilton broadly discuss when doing so may be a smart financial move. It's worth tuning in, because there may be better travel credit cards to consider to reduce out-of-pocket costs.

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Michael Douglass: Nathan, let's talk about kind of frighteningly large annual credit card fees. There are cards in the market that have $300, $400, $450 annual ...

Nathan Hamilton: And higher.

Douglass: Yeah, and higher, annual credit card fees. Fortunately you've kind of broken down the math as to hey, here's when you actually, theoretically, might break even on that kind of fee. Let's talk through that.

Hamilton: Yeah, we'll go a little bit into the numbers, so if you're following along maybe now's a good time to pay attention, whip out the pen and paper, and start writing some things down. We'll make it generally pretty easy.

Douglass: You can also replay the video.

Hamilton: Exactly.

Douglass: We've got a few different things you can do.

Hamilton: Stop and replay. 

Douglass: Yeah, it's a beautiful thing.

Hamilton: Looking at, very broadly and very simply, a $450 annual fee, if you're comparing that to, say, a no-annual-fee card, our estimate is about $30,000 of travel spending. That's comparing a card that earns about a 3% yield on travel spending versus a card that earns 1.5% cash back and no annual fee. At that $30,000 amount, if you're surpassing it you're breaking out, you're breaking even and getting ahead of the other card on an all-in net basis.

Now there are other things to consider. For some people it does make sense, but there are other things to consider, because premium credit cards like this, they do offer pretty lucrative sign-up bonuses, but you have to look at it as that's a one-time thing. If you look at your credit history, how we believe you should use credit cards, credit cards should be used to establish a long-term relationship. It's not necessarily churning the offer just for the sign-up bonus, ditching the card, and saying "On to the next one."

You really have to take into account, OK, when does paying this fee make sense? Because for some that have heavy travel budgets or spend a lot of credit, it absolutely makes sense and you're going to come out ahead. There are other premium perks that they offer as well that are worth considering. If you boil it down to the basics, just looking at this calculation, looking into how to actually calculate it yourself or how we did, you take $450 and divide that by the difference in the earnings rates. In this scenario, 450 divided by 3% minus 1.5%. That's going to tell you your breakeven point. 

Douglass: Right. It's a lot of money.

Hamilton: It is. Yeah.

Douglass: Yeah. A lot of money. In this case you'd have to be spending on travel, for example. I think for folks listening or watching or thinking about this, the answer is to kind of look at your own budget and figure out, OK, how much am I actually spending on these things, and does this make sense in my circumstances? We can't tell you if it does, but the important thing is to go ahead, sharpen the pencil, do your own math, and figure out what makes sense. 

Now, once you have thought through a sort of, OK, here's where I'm spending my money and here's where I want to get the most cash back, we've got a lot of resources on Fool.com/creditcards to help with exactly that. We've got the best, our picks for the best no-annual-fee credit cards. We've got our picks for the best travel credit cards, the best overall credit cards of 2017.

Hamilton: Some of them are a high-fee premium card. It does make sense in some scenarios.

Douglass: Yeah, exactly. It's really just once you've figured out what you're looking for, we've got some resources to really help, and we've also got resources to help you make that decision and think through what you're looking for. Again, check us out, Fool.com/creditcards. We've got a lot more information there. Nathan, thanks as always.

Hamilton: Thank you. 

Nathan Hamilton has no position in any stocks mentioned. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.