Anything that encourages you to save is a good thing. Or is it? Investment rewards credit cards are touted as a savings tool. The cards, around for more than a decade, are still a small slice of the rewards card pie. They’re linked to vehicles like a money market, brokerage or investment account, or college savings plan. Rewards are credited to the accounts as a percentage of the purchase activity on the card.
“It’s a great way to supplement your investment efforts by using your own spending to help fund a college education or a retirement account,” says John Ulzheimer, president of consumer education at SmartCredit.com.
For example, with the Upromise World Mastercard there is no annual fee or limit on how much you can earn. You also get 4% cash back at Upromise dining restaurants and up to 3% on eligible gas purchases at Exxon or Mobil locations, 2% at certain movie theaters and 1% on everything else. The cash can be deposited monthly in your account and then invested in a tax-deferred 529 college savings plan; deposited into a Sallie Mae savings account; used to pay a Sallie Mae student loan, or you can receive payment by check, explains Debby Hohler, a spokesperson for Sallie Mae, the parent company of Upromise. While there’s no tax on the money earned at the time you invest it in the 529 plan, when withdrawing, it is important to make sure it is for qualified education expenses to minimize taxes, says Hohler.
Big spenders benefit. Investment rewards cards can offer two points per $1 spent, compared to the typical one point for $1 for other reward cards. The savings add up: In 2012, Fidelity customers averaged nearly $122 in rewards per month using their Fidelity Rewards Cards, which put them on track to earn nearly $1,500 by year-end, according to William McLimans, senior vice president of cash management for Fidelity Investments.
No annual fees. “You’d expect annual fees, but these cards don’t have them. And, the credit limits can be very high. Mine is $35, 000,” says Ulzheimer.
The most fundamental benefit is that it keeps card holders on track for investing and saving, “staying true to the pay-yourself-first rule,” says Bruce McClary, spokesperson for ClearPoint Credit Counseling Solutions.
Temptation to overspend. However, like anything else, it’s not all win-win. It is possible that you will be enticed to spend more. This is because the more you buy, the more you earn. Avoid choosing this type of card unless you’re very disciplined.
Potentially high interest rates. The ratio of interest rate to award credits can diminish the benefit of having the card, points out McClary. “Low usage means low returns. Missing even one payment on some of these cards will send interest rates as high as 30%.” Interest rates are competitive — about 13% on the low end. But rates vary. The Upromise World MasterCard ranges from 12.99% to 20.99%, depending on credit worthiness. The Annual Percentage Rate varies based on the prime rate, says Hohler.
“The trick is to use the card to buy only what you would already buy and leave it at that. Never revolve a balance,” says Ulzheimer.
For some, these cards aren’t an option. “Like many rewards cards, you usually need a good to excellent credit score to qualify,” points out Ken Lin, founder of CreditKarma.com.
The bottom line: proceed with caution.