Taxes, tuition can rack up rewards, for a fee
When does it make sense to pay a 'convenience fee' to earn big rewards?
If you love piling up points on your
rewards credit card, the prospect of paying college 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.
As a rule of thumb, the fees negate
the value of any miles earned as well as cash back
rewards, say experts.
Let's assume you earn 1 mile for
every dollar you spend on your rewards card, but every dollar spent comes with a
1.89 percent convenience fee (also called a transaction 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.
There are two scenarios, however,
when it might make sense to pay a fee to use plastic, Kelly and other rewards
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 Preferred
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 tuition: According
to preliminary data from the 2013 Student Financial Services Policies
and Procedures Study conducted by the
National Association of College and University Business Officers, approximately
56 percent of higher education institutions accept credit card payments
without charging a convenience fee. However, for the remaining 44 percent
that do, the fees will either be a flat rate or percent of your bill.
Policies vary, so look for details on each school's website payment portal.
- Paying taxes: The
IRS offers four options for paying federal taxes via plastic. PayUSAtax.com has the lowest fee, 1.87 percent, and accepts MasterCard,
cards. You can use your American Express, but you'll pay a 2.29 percent
fee. Many municipalities also allow you to pay your property taxes via
credit card -- with a fee. CreditCards.com
surveyed five major U.S. cities -- New York City, Boston, Philadelphia,
Columbus and Charlotte -- and found that convenience fee charges for paying
property taxes with a credit card are typically between 2 to 3 percent of your
total tax payment. Rates vary, so check your local taxing authority.
- Paying your mortgage: Mortgage servicers typically don't allow borrowers to
make direct payments using a credit card, but some have made agreements
with third party vendors -- such as chargesmart.com -- that will take your credit card details and pay your
mortgage for a flat fee plus a percentage of your payment. The fees for
this service vary based on the amount of your mortgage and your mortgage
company, but are typically between 1.5 and 3.5 percent of your payment.
your rent: Landlords are increasingly offering tenants
the option of paying
rent with a credit card. Convenience fees for such transactions are
typically around 2.75 percent of your bill, but in this case rewards may
outweigh costs. Some third-party payment facilitators that landlords are using
to process the card payments are rewarding tenants for using their card payment
services by offering discounts to local businesses and services.
As long as
you're looking for ways to rack 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
Of course, charging large purchases should only
be an option if you have the means to pay the credit card bill when it comes
due. Allowing interest to accrue by rolling over a balance, along with paying
any transaction or "convenience" fees will most certainly negate the
value of any rewards that you can amass.
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?
Updated: August 15, 2014
Three most recent Reward programs stories:
- 6 rules for 'card flipping' – While "flipping" cards to take advantage of promotional deals can lead to free travel and other perks, if you don't play the game correctly, you can trash your credit ...
- Buying a car with a credit card often an uphill fight – Using a credit card to buy a car could give you consumer protections and perks. But most dealers hate the fees that go with accepting plastic, so you might have to wheel and deal ...
- Small banks, credit unions keep debit rewards programs alive – Three years after big banks started pulling the plug on debit card rewards programs, many small banks and credit unions are finding surprising success in offering similar rewards to their customers ...