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Taxes, tuition can rack up rewards, for a fee

When does it make sense to pay a 'convenience fee' to earn big rewards?

By Michelle Crouch

If you love piling up points on your rewards credit card, the prospect of paying tuition, taxes and other big expenses with your card can be awfully tempting. But as you may have already discovered, you will probably have to pay an extra "convenience fee" to use your credit card, usually ranging from 1.8 percent to 3.5 percent.

So the question becomes: Is it ever worth it to pay the fee?

The answer is usually no, say experts.  As a rule of thumb, the fees negate the value of any miles earned as well as cash back rewards, which usually top out at about 1.5 percent. Assuming that you earn one mile for every dollar you spend on your rewards card but every dollar spent comes with a 1.89 percent fee. And let's say you amassed 60,000 miles and spent them to fly economy to Europe. You'll be paying $1,134 (60,000 x .0189), which is no bargain, says Brian Kelly, founder of ThePointsGuy.com.  "You could probably pay $700 or $800 for that same trip and you'd also earn miles," he notes.

Taxes, tuition can rack up rewards, for a fee

There are two scenarios, however, when it might make sense to pay a fee to use plastic, Kelly and other rewards experts say:

1. To qualify for an introductory offer. If you've signed up for a rewards credit card that requires you to spend a certain amount in a short time frame to get a big bonus, paying a fee may be worth it, says Rick Ingersoll, who blogs about credit card rewards at FrugalTravelGuy.com.

The Chase Sapphire card, for example, gives you 40,000 bonus points -- or $500 in travel credit -- after you spend $3,000 in the first three months.  Even if you pay a 2 percent fee to reach the requirement, you're still getting 16 percent ($500 from $3,000) back. "It's all about what they are going to charge you and what are you are going to get in return," Ingersoll says. "If paying your taxes or tuition with your card is the only way you're going to qualify for a big bonus, do it."

2. To hit a specific elite status. If you're trying to reach elite status at a hotel chain or airline by spending a certain amount in a year on your hotel or airline affiliated credit card, the benefits you'll get may be worth more to you than the amount of the fee, notes Gary Leff, co-founder of frequent flier community milepoint.com.

"A higher status will often qualify you for hotel upgrades, free breakfast, free Internet and club lounge access for a year," he explains. "If you travel enough, it will pay for itself." Some cards also offer extra points if you hit an annual spending threshold. The American Express Premier Rewards Gold card, for example, gives you a 15,000-point bonus if you spend $30,000. So if you're $4,000 away from that threshold, you can earn a total of 19,000 points (4,000 from the spend, plus the bonus) for the $80 you'd pay to cover a 2 percent fee.

If you decide that paying a fee makes sense for you based on the benefits you'll get, here's what you need to know about each of the options:

  • Paying taxes: The IRS offers four options for paying federal taxes. PayUSAtax.com has the lowest fee, 1.89 percent, and accepts MasterCard, Visa and Discover cards. To use your American Express , you'll have to use another vendor and pay a 2.29 percent fee.  Many municipalities also allow you to pay your property taxes for a fee, usually between 2 percent and 2.5 percent.
  • Paying tuition: According to the National Association of College and University Business Officers, in 2007 (the most recent year for which data is available), 26 percent of colleges charged a fee, an increase from 14 percent in 2003. Fees typically range between 2 percent and 3 percent, but some schools charge a flat fee (these are usually a deal and worth doing) and others don't accept credit cards at all. And some, particularly community colleges, still charge no fee. Look for information on each university's website.
  • Paying your mortgage or rent: Most mortgage servicers don't allow borrowers to make direct payments using a credit card, but chargesmart.com, a third-party vendor, will take your credit card and pay your mortgage for a flat fee plus a percentage of your payment. The fees range based on the amount of your mortgage and your mortgage company, but they usually end up at between between 3 percent and 5 percent of your payment.
And as long as you're racking up points, don't forget that there are other big payments you can make without paying a fee. You could prepay for a funeral, pay for your next home improvement project (or just the materials) or even pay for part of a car purchase. "A lot of car dealers will tell you they can't put it on a credit card, but without a doubt, they can do it if they want," Kelly says. "I recommend first agreeing on the price you want to pay, and then telling them you want to put $5,000 of it on a credit card. You say, 'Look we came to a price, I'm willing to pay, run it now or I'm walking. I've done it and have been able to put $12,000 of a car purchase on a credit card."

See related: Pros and cons of paying taxes with a credit card, Convenience fees: When is it OK to charge extra to accept credit cards?

Published: December 21, 2012


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