A card with an annual fee is not automatically worse than one without. It is a trade: a
known cost in exchange for benefits whose value depends entirely on whether you use them. The
calculation is straightforward, but it has to be done with your own spending rather than the
example in the marketing.
Count only what you would have bought anyway
Start by listing the benefits and assigning each a value based on your actual behaviour over
the last year. A travel credit is worth its face value only if you travel; a dining benefit only
counts to the extent you were going to eat out regardless. Benefits that would change your
spending in order to be captured are worth considerably less than their stated value, because
the extra spending is a real cost.
Then calculate the earn rate against your real annual spending in each category. Multiply,
add, subtract the fee. The result is a single number, and it is frequently negative for people
who chose the card on its headline rate.
The rate only matters if you clear the balance
There is one condition that overrides the entire calculation. Rewards are typically a small
percentage of spending, while interest on a carried balance is a much larger percentage of the
balance. If you do not clear the statement in full each month, the interest will exceed the
rewards comfortably, and the optimisation is irrelevant.
For anyone carrying a balance, the lowest-rate card available is almost always the better
product, regardless of what it earns. Rewards are a feature for people who have already solved
the more expensive problem.
