Investment cards: Spend today, rewards tomorrow
Specialty cards build college savings, retirement funds
By Tony Mecia | Published: January 17, 2013
Need one more excuse to shop? How about this: It can help you retire earlier or save for your kids' college expenses.
Investment rewards cards remain a relatively unknown segment of the market, and could be right for you if you keep your expectations in check. The field is in flux, with some brokerage houses having dropped cards that earn investment rewards, while other options such as online malls are offering consumers new ways to pad savings and investment accounts.
The cards function with a mechanism that's similar to cash-back rewards cards. You earn a percentage back -- generally 1 percent or 2 percent -- when you make purchases with the card. The difference is, instead of receiving cash, you have the option of funneling that money directly into a retirement account, 529 college savings account or other investments. (To see how much the rewards could add to your investments, check out the "See how your money grows" table below).
People drawn to these rewards say they're not becoming overnight millionaires, but every little bit they earn counts.
"I'm not getting rich off the credit card, but it is a nice little return for doing something you're going to do anyway," says Marshall Jackson, a 42-year-old who lives in Atlanta and uses a Fidelity Investment Rewards .
He says he chose the card because of its simplicity and high rate of return: 2 percent on all purchases. He puts all the spending he can on the Fidelity card, except for travel and restaurant expenditures -- which he puts on a card that offers big bonuses in those categories. Although he could direct the Fidelity rewards into an investment, he prefers to channel the money into a Fidelity cash-management account that he uses to fund trips.
I'm not getting rich off the credit card, but it is a nice little return for doing something you're going to do anyway.
|-- Marshall Jackson
Fidelity Investment Rewards American Express cardholder
Just a few years ago, several major brokerages, including Charles Schwab, E*Trade and optionsXpress, offered similar cards. But those cards have since been discontinued due to the financial downturn. The cards were becoming too costly for brokerages and bankers, who were chasing fewer potential customers in a tightened credit market.
Sam McLimans, Fidelity's senior vice president of cash management, says his company worked to ensure its investment rewards card not only survived, but thrived. He says the business has grown exponentially since the card was introduced in 2009.
Most customers direct their cash-back savings into Individual Retirement Accounts or 529 college-savings plans, though some roll the rewards into cash accounts when they reach contribution limits in those plans. The average cardholder earns $122 a month in rewards.
"We have had tremendously strong growth in what would be categorized as an emerging credit market," McLimans says. (Story continues below).
|COMPARE INVESTMENT REWARDS CARDS|
|Fidelity Investment Rewards Visa Signature||Fidelity Rewards American Express||Upromise World MasterCard|
|Cash-back percentage||1.5% on first $15,000 spent per year; 2% thereafter
||2%||1%-5%, depending on purchase. 5% for certain purchases via Upromise.com; 4% for dining at affiliated restaurants; 3% for certain gas purchases at Exxon
|Reward destination||Fidelity account, including cash management, brokerage, 529 plan, IRA
||Fidelity account, including cash management, brokerage, 529 plan, IRA
||Money can go to a Upromise account, including high-yield savings account by Sallie Mae; Upromise 529 plan; or Sallie Mae student loan payments. Or you can receive a check for the funds
|Restrictions||Must have or open Fidelity account
||Must have or open Fidelity account
||Must open Upromise account (free)
Shopping programs boost rewards
Another established player is Upromise, which is owned by student lender Sallie Mae. Users can earn between 1 percent and 8 percent back on purchases made at participating retailers, gas stations, restaurants and travel providers both online and in person. The rewards can go toward a Upromise 529 savings plan, a high-yield Sallie Mae savings account, or certain student loan payments. You can also get the money in the form of quarterly checks.
Earning potential increases if you use the Upromise World MasterCard at participating merchants. The card will give you up to 5 percent cash back when you shop at the Upromise online mall, in addition to the points offered by retailers.
To get all the rebates, however, you have to register your credit and debit card numbers with Upromise, along with your grocery loyalty cards. For online shopping, you have to use links from Upromise's website or download a web browser toolbar that monitors your online activity.
Although the idea is to capture as much of your spending as possible so you maximize your savings, understanding the nuances of the program and taking those steps might be a turnoff for some people. In April 2012, Upromise settled charges by the Federal Trade Commission that it did not adequately tell consumers about all of the information it is collecting. Under the settlement, Upromise must clearly disclose those practices and get your consent to collect your data. It will also have to create a comprehensive information security program, to be audited every two years for the next 20 years.
In practice, Upromise is a cash-back extensions of online malls that have become standard in credit-card reward programs. But the difference here is you can use any card to make the purchases, which allows you also to claim any rewards your card offers, in addition to those obtained through Upromise.
Won't make you a millionaire
Unless you possess the stock-market wisdom to direct your rebates into buying stock of the next Google, the amount of money you’re likely to make from investment cards and online malls alone probably won't be enough to change your life or fully meet your financial goals.
The amount saved is a small percentage of the amount spent, but with the magic of compound interest, small amounts grow exponentially larger over the years. For instance, if you spend $1,500 a month for 30 years and receive 1 percent back on your purchases, you would have more than $18,000 if you averaged a 7 percent return per year.
"I wouldn't use this as a substitute for having a good investment strategy, but it might be a substitute for having to transfer $100 to your investment account every month," says financial adviser Will Ertel, president of Tassel Capital Management in Matthews, N.C. "It can be a way to supplement or create some savings you aren’t otherwise building."
Nationally, Americans have been saving more since the 2008-09 recession. Figures released in December 2012 by the Commerce Department show that consumers saved on average 3.6 percent of their disposable income the previous month. That's up from around zero in 2008.
Ertel also advises not to expect wild gains: The stock market could fall, or the investments you choose could produce meager returns. But for people who worry about their lack of savings, receiving rebates for purchases they would have made anyway could make sense, he says.See related: Taxes, tuition can rack up rewards, for a fee, 3 trends shaping today's rewards credit cards, 6 steps to minimize debt, maximize credit card rewards
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