American Express has been sending out letters to holders of its Starwood credit card, announcing a hefty 44% percent hike in their annual fee. My notification arrived in the mail today. (Notably, in the mail… not e-mail.) Starting October 14, 2010, the next time the card renews, the fee rises to $65 a year. (If your card renews before that date, you get it at the old rate for another year.) It’s the second hike in two years — the $30 fee went to $45 in 2008.

The sales pitch argues that the card now comes with new benefits:

• Buy-two-nights-get-one-free option on Starwood-family hotel stays
  Okay, fine, but there are plenty of strings attached to that. Prepayment. Limited dates. Participating hotels only. And a lack of clarity on whether the rates are actually the lowest available. Big whoop.
• Five nights credit toward elite status
  That means 20 nights to gold instead of 25, 45 to platinum instead of 50. It’s nights, not stays. No bone being thrown to those who reach elite level with stays rather than nights? Pfft.

Color me unimpressed by the new benefits or the new price. These “benefits” don’t warrant a 44% price hike. This sure looks like a downgrade. It looks, swims, and quacks like a downgrade. It’s a downgrade.

I still like the Starwood program because of its flexibility. Not only do you earn points that can be redeemed for hotel stays, but you can convert your points 1:1 — at no cost — into a laundry list of airline programs. They even give you a 5000-point bonus if you transfer a threshold of 20,000 Starwood points — making those worth 25,000 airline miles.

So the next question is whether or not to hold onto the card, now that the price tag is higher.

For the time being (especially with nearly half a year left before I need to renew), I’m staying put. I’m still getting a good return by putting points into SPG and leveraging those for high-value awards worth more than 2 or 3% cash rebates.

But take away redemption opportunities or make it harder to cash in, and it may be time to look more closely at the Costco Amex’s 3% cashback on gasoline and restaurants, and 2% back on airlines, car rentals, travel agents, and hotels is tempting. Especially since the Costco card has no annual fee if you’re already a member there.

(For those who were considering becoming Starwood Amex cardholders before this news — and I get a number of e-mails asking me about the card — you still get the first year free; the second year is when they sock it to you.)

Current cardholders, does this change the value proposition for you? Are you sticking with the Starwood Amex or bailing out?