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 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 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, Visa and Discover 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.
- Paying 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 credit card."
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