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When is it worthwhile to pay an annual fee for a credit card?

CNBC Select breaks down why credit cards have annual fees, how you can calculate whether an annual fee is worthwhile and steps to take to get your annual fee waived or reduced.

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If you want a credit card with a lot of perks and strong rewards program, you usually have to pay a big annual fee, in some cases up to $500. Some cardholders consider the high cost worth the benefits offered. But if you're a little more wary, how do you know if you're getting enough value to justify paying an annual fee for a credit card?

Below, CNBC Select breaks down why credit cards have annual fees, how you can calculate whether an annual fee is worthwhile and steps you can take to get your annual fee waived or reduced.

Why card issuers charge annual fees

Card issuers charge annual fees to offset the cost of offering cardholders numerous features and benefits. They wouldn't be able to offer annual $300 travel credits, Global Entry and/or TSA PreCheck credit or competitive rewards programs for free. If you want a luxury credit card or the ability to earn generous rewards, expect to pay an annual fee.

Learn more: When will my credit card annual fee be charged?

How to calculate when it's worthwhile to pay an annual fee for a credit card

Before you open a credit card with an annual fee, you should calculate whether it's worth the added expense.

Let's take the Capital One® QuicksilverOne® Cash Rewards Credit Card, which has a $39 annual fee. Cardholders earn 1.5% cash back on every purchase. To figure out the amount of money you'd need to spend annually on the card to break even on the annual fee, divide $39 by .015 to get $2,600. If you plan on spending at least $2,600 a year on the card, then the $39 annual fee is worthwhile.

Calculations get a little bit harder when you're looking at cards with bonus rewards rates and annual statement credits. You'll have to consider whether you'll take full advantage of the annual credits and also look at your yearly spend summary to see how much you spend in the bonus categories.

Here's an example using the Chase Sapphire Reserve® and a sample annual spending budget of $22,126 created by location intelligence firm Esri. The Chase Sapphire Reserve® has a $550 annual fee, $300 annual travel credit, $60 annual DoorDash credit (both in 2020 and 2021) and offers 3X points on dining and travel (immediately after earning your $300 travel credit) and 1X points on all other purchases. If you take full advantage of the $300 travel credit and $60 DoorDash credit, the annual fee is effectively $190. Then if you consider the Priority Pass Select membership, valued at $429, you more than offset the $550 annual fee.

According to the sample budget, annual spending on dining is $3,375 and travel is $2,244, which would drop to $1,944 after the $300 annual travel credit kicks in. That leaves $16,207 for all other expenses. The table below represents how to calculate the amount of rewards you'd earn each year.

Category Estimated annual spend Rewards rate Estimated points earned
Travel$1,9443X5,832
Dining$3,3753X10,125
Everything else$16,2071X16,207

The total rewards is 32,164 points and when redeemed for travel through the Chase Ultimate Rewards® portal that's worth 50% more, so roughly $482. That helps effectively reduce the annual fee to $68 if you don't consider the numerous additional perks offered by the Chase Sapphire Reserve®.

How to get a credit card's annual fee waived or reduced

If you're second-guessing whether your credit card's annual fee is still worthwhile, you can try asking for a retention offer. You may receive a one-time fee waiver, lump sum of points or an offer similar to a welcome bonus where you earn rewards after spending a certain amount.

To increase your chances of receiving a retention offer, call customer service and ask for the retention department. Then plead your case to the representative and state why you no longer get full value from your credit card. This may include using other cards more, a change in your spending habits or maybe the issuer has raised the annual fee. It could take a few calls to get a retention offer, and even then you may not receive one.

If you don't receive a retention offer, you can ask to be downgraded to an alternative no annual fee credit card or a card with a lower annual fee. Financial experts don't recommend closing credit cards since it can potentially have a negative impact to your credit score, but there can be exceptions if the cost of the card outweighs its benefits.

Don't miss: 8 common credit card fees and how to avoid them

Information about the Capital One® QuicksilverOne® Cash Rewards Credit Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the cards prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.