The Four Types of Credit Cards

Tl;dr: Know whether a card is free to hold, has a net-zero fee, whether it has perks worth paying for, or whether it’s only good for the bonus. 

There are a lot of credit cards out there, and it can be hard to tell them apart or decide which one to get. If you go to any website focused on credit cards, you might see rankings, ratings, recommendations, or similar things. But the first step in deciding whether a card makes sense for you, in my opinion, is to categorize it based on the following four questions. Does it have a fee? If so, is that fee canceled out by the credits it offers? If not, are the other benefits of the card worth its net fee? And, if not, is it worth getting the card just for the welcome offer/bonus? 

No-fee cards

Many great credit cards come with no annual fee. This is obviously great because you don’t need to pay anything to get, keep, and use the card. Many of these cards have surprisingly robust earning power and benefits. For example, the Bilt Mastercard earns 3x points on dining, 2x on most major travel expenses, 1x on rent and other purchases, with top-end travel protections, free concierge service, and the best points system on the market. Other cards can pair with an annual-fee travel rewards card to boost your earnings. For example, you can supplement your Chase Ultimate Rewards by pairing a Sapphire Card with a Freedom Card or boost your Citi ThankYou points by pairing a Double Cash or Custom Cash with the Strata Premier. 

These cards do have some downsides, however, so don’t let the lack of a fee lure you into filling your wallet with too many of these cards. Adding cards can impact your credit and your ability to manage your finances. While those impacts can be mitigated with good management, it may be a waste to suffer those impacts for low-value cards that might be crowding out better cards or even making you ineligible to get the best cards on the market. The no-fee cards also often (but not always) lack high-end protections like car rental or trip delay insurance, and usually offer much smaller welcome bonuses (if any) than their higher-end counterparts. 

Top no-fee cards:
Bilt Mastercard
Citi Custom Cash
Capital One Savor

Other strong no-fee cards:
Citi Double Cash
Chase Freedom Unlimited
Chase Freedom Flex
Discover It
American Express Blue Cash Everyday

No net fee cards

Many of the best credit cards out there require you to pay an annual fee, but offer enough direct value that they are essentially free to hold. While there are several cards that I consider to be net-zero fee cards for almost anyone (e.g. $100-fee hotel credit cards with a free night and the Capital One Venture X), in most cases whether a card has a net fee or not will depend on you and your spending habits. So how do you know if a card will have a net-zero fee for you? Look for the following four things:

1) Pre-existing expenses

In calculating whether a credit offsets an annual fee, you should only count expenses you are already paying before getting the card. For example, I spend $15+ every month on Uber rides or Uber Eats delivery, so the Uber/rideshare credits on Amex’s Gold and Platinum and high-end Delta co-branded cards is the same as cash back in my pocket. But until I got my AA and Delta credit cards I never paid to check a bag, so even though I have “saved” over $1,000 in checked bag fees since I got those cards, I don’t count that as offsetting the annual fee, because if I got rid of the cards I would simply go back to carrying my bag on board. 

2) Certainty of expense

You should only count expenses that you are sure to have in the time period specified by the credit. Many credits are broken up monthly, like Amex’s Uber credits above. If you’re certain to take a lot of Ubers but usually have a few months with no Uber expenses each year, you might want to reduce the value of the credit in calculating the net annual fee. 

3) Ease of use

In calculating your expected return on credits, you should keep in mind the ease or difficulty in actually using the credit. The Amex Gold, for example, has a $10 dining credit every month that can be used at Grubhub, among other merchants. I get takeout frequently, so takeout is a preexisting expenses that I am certain to have each month, and ordering my takeout through Grubhub is a way to offset that expense with an Amex credit. However, this requires me to remember to log into Grubhub and make sure that I place at least one order through that site each month. For me, this isn’t too difficult, and is even more rewarding because I can get extra Amex points by doing this through Rakuten. But other people might skip this hassle altogether, or at least for get a few months of the year, reducing the value of the credit.

4) Substitutability of expense

Finally, consider whether the credit is a reasonable substitute for your pre-existing expenses and whether the value is fully comparable to them. For example, the Chase Sapphire Reserve offers an annual $300 credit towards general travel spending, so almost anyone is basically certain to receive the full value of that credit. By contrast, the Amex Hilton Surpass card offers four $50 credits–one each quarter–toward a Hilton stay. Even if you stay in a hotel at least once each quarter, you might only be receiving $25 in real value from that credit if it causes you to stay at a $150 Hampton Inn instead of a $125 Fairfield Inn that you would have chosen otherwise. If there’s no suitable Hilton available during your travels in a given quarter, the value would be $0.

Best no-net-fee cards:
Capital One Venture X
IHG Premier
World of Hyatt

Other great cards that are often no-net-fee:
Amex Gold ($10 net fee)
Airline Cards
Hotel Cards

Once you’ve run the numbers and decided a given card will require you to pay a net annual fee, the question becomes: is it worth it?

Perk cards

Would you pay extra for more luxurious travel?

For some cards, the benefits you get from the card may be worth the annual fee you pay, even if the credits that come along with it don’t fully offset the fee. In this situation, you simply have to decide whether you’re willing to pay that amount for the perks that come with the card. Most of the cards in this category offer premium, luxury experiences which are nice, but will cost you.

Although I recommend being conservative in estimating whether you’ll use a credit when calculating the net annual fee, if you leave it out of your calculations there, it becomes a perk here. For example, I would never pay to visit an Admirals Club lounge or to upgrade my seat on a flight, so I don’t give the Amex Platinum’s $200 airline incidental credit any value when calculating the net annual fee, but I definitely consider that as one of the card’s many perks when I’m considering whether I’m willing to pay $255 each year to hold the card. 

Top perk cards (typical approximate net fee; benefits)
Delta Amex Platinum ($80; upgrades, companion certificate, status boost)
Amex Platinum ($255; lounge access, Marriott and Hilton Gold status, Clear access, credits)
Hilton Aspire ($150; free night at ultra-premium properties, Diamond status, resort credit)
Citi AA Executive ($355; access to Admirals Club and OneWorld partner lounges; VIP check-in)
Marriott Bonvoy Brilliant ($150; Platinum Elite status, Priority Pass lounge access)
Certain hotel and airline cards

Remember to consider lower-fee alternatives. For example, if you want Priority Pass lounge access, the Chase Sapphire Reserve offers it for a $250 net annual fee… or you could pick up the Capital One Venture X with no net annual fee. Likewise, if you want top-tier rewards, you could pay $30-50 each year for the Chase Sapphire Reserve… or get slightly better rewards with the no-annual-fee Bilt Mastercard. 

Bonus cards

What if you’re not willing to pay the cost to hold a given card, especially with so many low- or no-cost alternatives around? You may still want to consider picking up that card, at least for a while, but primarily to earn a welcome bonus. These are the bonus cards–they might not make long-term sense in your wallet, but they can offer a massive short-term infusion of points. 

If you choose them and time them right, you can earn close to or over $1,000 in value. Some recent examples include:

75k Ultimate Reward Points on the Chase Sapphire Cards

100k AA miles on the Citi Executive card

60k Membership Rewards Points + $200 on the Amex Green

70k Alaska miles on the Alaska Visa Signature

70k AA miles on the Barclays AA Aviator Red 

60k TAP miles on the Miles&Go card

75k AA miles on the Citi AA Platinum Select

That should round out the categories–if you’re paying a fee and not getting either good benefits or a decent bonus, that’s a card you may want to downgrade to a no-fee version, if possible, or cut ties with altogether. 

Conclusion

It might seem obvious, but it’s important to think about what you’re paying and what you’re getting when shopping for a credit card. Some cards offer perks or bonuses so lucrative that they’re worth shelling out for, even on an annual basis. But it’s important to make sure you accurately assess your costs and consider whether there are lower-costs alternatives to achieve your financial and travel goals.