Investment cards: Spend today, rewards tomorrow
Specialty cards build college savings, retirement funds
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 American Express.
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.
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
||1.5% on first $15,000 spent per year; 2% thereafter
||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
||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
|Transfer to your existing savings account or IRA. Can go into 401(k) or 403(b) if employer participates
||Must have or open Fidelity account
|Must have or open Fidelity account
|Must open Upromise account (free)
|Must shop via online mall (using any credit card) to claim rebates. Have to sign up for SaverNation account (free)
Shopping programs boost
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
A new program called SaverNation has some similarities to Upromise.
If you go to the SaverNation website before shopping at major online retailers,
you can receive between 1 percent and 15 percent cash back. The money goes
directly to an IRA or savings account. And if your employer has happened to
sign up, the money can go into your 401(k) retirement account.
In practice, Upromise and SaverNation are 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 or SaverNation.
"You're getting the cash back related to the purchase, not
to the credit card transaction," says Christy Noel, SaverNation's vice
president of marketing. "What's unique about us is you can save for retirement
without having less spending money."
Like Upromise, SaverNation tracks your online spending. To get rewards, you must sign in on its website and click its links to retailers before you buy. More than 600 merchants, including many
national brands, participate in SaverNation, but remembering to go to the
SaverNation site before shopping online and searching for the correct
retailer's link does involve a small extra step or two.
Won't make you a
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
Published: January 17, 2013
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