Most of the time, it’s a good idea to use a credit card for purchases that you have already planned for. With responsible usage, credit cards can help you build up your score. They offer protection against fraud, purchase, and other issues. Credit cards are also meant to save money, except for when they don’t.
Credit cards can offer generous rewards for spending, such as cashback or points. These rates are often outdone when it comes to interest charges if you do not pay the full card balance. Some credit cards also charge a credit card processing fee. They can be difficult to notice, but are becoming more common.
The cost of using a card versus cash depends on the rewards program, card processing fees and whether you can avoid paying interest. You can use your credit card to make money, rather than lose it, with a bit of financial knowledge.
Five times using your credit card to earn rewards just isn’t worthwhile, and one when you should do it regardless of the processing fee.
1. Gas stations
You may have stopped for gas because of an appealing per gallon sign but realized after filling up you actually paid more. You may have thought the price was listed in large numbers, but it’s actually the price that you will pay when you use your credit card.
Gas stations may charge a surcharge to credit card customers in order to recover the costs of swipe fees. According to the Association for Convenience and Fuel Retailing, this fee may range between 1.5% and 4%. If you are at a fuel station where credit cards cost more, find out the amount of surcharge. It may be more cost-effective to use cash or a debit card if the surcharge is higher.
2. The cost of tuition
Even though I love credit card rewards, I was forced to use an ACH transfer for my son’s pre-school tuition. It’s all because the payment processor for the preschool charges $28.52 per credit card transaction, which is almost 3% on the monthly invoice. I couldn’t justify paying for the tuition using my credit card, which only offers 1.5% in cashback.
Ask the daycare or school if they charge a surcharge for using credit cards. Ask the school or daycare if there are any surcharges for credit card payments.
3. Payments to the Government
The annoying bills that you receive from the government, whether it’s federal, local or state governments will often include a charge for payments made by credit cards. For example, the IRS offers three processors who charge between 1.85% to 1.98%. You can only get a small advantage if you pay your taxes with a card that offers at least a 2-percent reward rate.
The car registration fee is a little different. Some states have a fixed fee, while others use a percentage. You may end up losing money if you pay with your credit card in some states, even if you have redeemed any points.
4. You can pay for large purchases over time.
You may be tempted to charge large purchases to your credit card to earn rewards. This can work out well, but only when you pay the full balance on time. If you don’t pay on time, your rewards will be wiped out by late fees, interest or both.
Let’s say your AC unit is in need of replacement at a $5,000 cost. The charge is made on your credit card, which earns you 2% on each purchase. You get $100 cashback. If you don’t pay off the debt in a single billing cycle (assuming an APR of 16.99%), you will end up paying $70.30 as interest. As long as you carry a credit card balance even if the amount is less, interest will be charged. This can eat away at your rewards. You’re better off with a credit card that offers 0% interest for a limited time.
5. Local merchants
In order to reduce their overhead, smaller establishments like corner shops or mom-and-pop restaurants may charge an additional fee when accepting credit cards. You can find the fee at the cash register, on the menu or by asking an employee. It is not uncommon to see surcharges as high as 4%, which are higher than the reward rates on most credit cards.
This is where things get fuzzy. Isn’t it worth paying the 4% extra if you use a credit card that gives 5x points on dining? Most likely not. It’s simple to figure out how much cash you will earn with a card that offers 2% on every $100 spent. That’s $2. But determining the worth of credit card miles and points isn’t as straightforward. Value can differ depending on how and what you use your points for.
It’s not a bad idea to avoid swiping when you are unsure. You can come out on top in some situations if your maximize rewards using the correct card, and optimize redemptions.
One time, you may ignore the ‘rules.’
Some credit cards provide massive bonuses as points or miles, which are linked to spending requirements within a specified time period. This is usually three to six month after the account has been opened.
It may make sense to keep using your credit card until you reach the threshold, even if the merchant is charging you extra to pay with credit cards.
Imagine you are $500 from a sign-up bonus of 80,000 miles. These miles can be worth thousands of dollars if you transfer them to the correct travel partner. A few processing charges on credit cards are worth it in this case to get a sign up bonus.
Pay off your balances on time and in full to avoid interest, which could reduce the value of a bonus.