What's the benefit of a credit card with an annual fee, vs. a no-fee card?

Question

My credit cards don't have an annual fee. I get mailers from American Express all the time and I see that card has an annual fee. I know a few friends and see a lot of people subscribed to such cards and I wonder why? I think one reason could be rewards. Even if the fee is $100 per year, I highly doubt if the rewards the card gives out will be greater than $100. What am I missing?

For an average American middle class head of the house hold, what could be the benefit of subscribing to credit cards which charge an annual fee?

Answer 1

How would you respond to these cases:

1. Limited card options - If someone has a bad credit record the cards available may only be those with an annual fee. Not everyone will have your credit record and thus access to the cards you have.

2. Some annual fees may be waived in some cases - Thus, someone may have a card with a fee that could be waived if enough transactions are done on the card. Thus, if someone gives enough business to the credit card company, they will waive the fee.

On the point of the rewards, if the card is from a specific retailer, there could be a 10% discount for using that card and if the person purchases more than a couple thousand dollars' worth from that store this is a savings of $200 from the retail prices compared to what would happen in other cases that more than offsets the annual fee. If someone likes to be a handyman and visits Home Depot often there may be programs to give rewards in this case.

Credit cards can be useful for doing on-line purchases, flight reservations, rental cars and a few other purchases that to with cash or debit can be difficult if not close to impossible.

Some airline cards have a fee, but presumably the perks provide a benefit that outweigh that fee over the year. I'm thinking of the Citibank cards tied to American Airlines, first year free, then an $85 fee.

Answer 2

Just to make this a little less vauge, I will base everything on the Mercedes Benz American Express (MB AMEX) card, which is the closest to a $100 annual fee I found on American Express's website.

The benefits of a card with an annual fee generally are worth the cost if (and only if) you spend enough money on the card, and avoid paying interest to offset the benefit. Using the MB AMEX card as a reference, it offers 5X points for Mercedes Benz purchases, 3X points at gas stations, 2X points at restaurants, and 1X points everywhere else. Even if we only make purchases at the 1X rate, it only takes charging $10,000 to the card in a year in order to make up the difference. Not too hard to do on a card someone uses as their main method of payment. Every dollar spent at the higher rates only makes that easier.

There are a number of other benefits as well. After spending $5,000 on the card in a year, you receive a $500 gift card towards the purchase of a Mercedes Benz car. For anyone on the market for a Mercedes Benz, the card pays for itself multiple times with just this benefit.