The 1 Thing You Should Never Pay for With a Credit Card

By
A A A

Like most people who don't own a home, I pay rent every month. This past Tuesday after I debited my monthly payment directly from my bank account, I got to thinking: How many rewards points could someone rack up if they paid rent with a credit card?

Source: Flickr/Cincy Project.

The crux of this decision depends largely on your rent, your credit card, and the fee that your property manager will charge you for using it. Fees for these credit card transactions are unavoidable, because they cover the amount credit card companies charge your management company for processing. Let's work through the numbers.

Many miles, for a price
I have a card from Capital One that gives me 1.25 miles for every dollar I spend, and my property manager will charge me $40 to pay my rent with my card. My monthly rent is $1,392; add to that the $40 fee, and I'd really be paying $1,432 per month, yielding 1,790 miles. After one year of paying my rent this way, I would earn 21,480 miles and pay $480 in fees. That mileage has a dollar value of $107, based on Capital One's policy that 5,000 miles equals $25.

Now, each month I am already committed to paying $1,392 one way or the other. I have the cash on hand, so the real question here is whether all those miles are worth $40 each month. What sort of return could I expect if I put that money elsewhere?

To determine its value, let's consider some alternative options for that money. Again, $40 a month is $480 each year. Here's how its value breaks down when placed in a sock drawer, my savings account (with my actual interest rate), or the stock market:

Sock Drawer

Savings Account (0.75% APY)

Stock Market (6.8% CAGR)

Year 1

$480

$481.65

$480

Year 2

$960

$966.93

$992.64

Source: Author's calculations. Stock market return is based on historical data.

Realistically, the sock drawer and the savings account options would actually lose value if you factored in inflation, especially if you used them for a longer period of time -- say, 10 years. Similarly, using the stock market's historical average for a two-year period is not ideal, but these numbers do give us the answer to our question.

Forty bucks per month for two years would result in $6.93 in interest in my savings account, perhaps $32.64 in an index fund, and $214 in credit card points. The problem with the credit card points is that unlike the sock drawer or a savings account (and hopefully the stock market), you lose your entire principal. In other words, you are paying much more than you get in return, which makes no sense. You are better off paying your rent in cash and keeping that $480 in a drawer than you would be using it to earn credit card points.

If your apartment management company charges you a fee -- which it almost certainly does -- then paying your rent with a credit card is a giant rip-off.

Start your journey to stock market riches today
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, " Your Essential Guide to Start Investing Today Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here Click here to get your copy today -- it's absolutely free.

Aimee Duffy has no position in any stocks mentioned. The Motley Fool owns shares of Capital One Financial.. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Stocks

Referenced Stocks:

Motley Fool

Motley Fool

More from Motley Fool:

Related Videos

Stocks

Referenced

Most Active by Volume

112,131,130
  • $74.98 ▲ 5.18%
57,963,905
  • $8.32 ▲ 8.33%
48,392,602
  • $3.45 ▼ 0.29%
45,276,527
  • $36.17 ▲ 4.21%
44,800,927
  • $17.84 ▲ 0.34%
44,539,649
  • $97.03 ▼ 0.16%
44,078,180
  • $15.62 ▲ 0.64%
43,461,551
  • $35.50 ▼ 1.06%
As of 7/24/2014, 04:04 PM