Credit cards can offer more than just miles and cash back. They can also help boost your future.
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There are two major credit cards on the market that allow you to make certain types of investments with rewards, although there have been others in the past. The Upromise World Master Card allows cardholders to deposit their rewards into a 529 college savings plan or high-yield savings account, while Fidelity's investment-rewards cards offer a range of deposit options, including individual retirement accounts, 529 plans and brokerage accounts, to name a few.
It's a trend that has yet to take off. "There are certainly almost countless cash-back cards, miles cards and point-related rewards cards. The number of these investment-type cards, you can really count on one hand, which is sad because they're really good products," says John Ulzheimer, president of consumer education for credit-monitoring site SmartCredit.com.
Still, investment-rewards cards can help boost your savings, especially for younger cardholders who have time to watch their rewards investments grow, but they also come with their own rules and restrictions. Here's how to decide if an investment credit card is right for you.
How They Work
Like other rewards cards, investment credit cards convert a certain percentage of each purchase into cash or points. After accumulating a significant amount, cardholders can then deposit those rewards into the investment account linked to the card or opt to receive the rewards as a check they can spend or deposit into an investment account that's not linked to their card. With Fidelity, cardholders also may use points for travel, gift certificates and other merchandise. With Upromise, cardholders can use rewards to pay down student loans taken out through Sallie Mae and can accumulate greater rewards by shopping through the company's online retail partners.
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"I think you need to ask yourself, 'What kind of consumer am I? Am I someone who pays off my balance every month? Am I somebody who does a lot of online shopping?' People who fit both of those criteria will save the most and benefit the most from the card," says Debby Hohler, spokeswoman for Sallie Mae, Upromise's parent company.
There are a few significant differences among investment credit cards and other rewards cards, Ulzheimer says.
"You can fund an investment with thousands of dollars of money that you've earned through a rewards card, and that money can shrink in value. That doesn't normally happen with a rewards card," he says. "If you're not able to be comfortable with that type of an account, then this is not a rewards card for you."
Do the Research
Investment card holders also should carefully evaluate the terms and conditions of the credit card as well as the investment products attached to it. That means doing some comparison shopping to make sure that you're getting a product with high performance and low fees.
"The thing that's important is to know, especially when you're in tax-deferred products (such as an IRA or 529 plan), is to understand the products, know where your thresholds are within those products and ensure that you're working with a company that has the ability to help you control and monitor what's going into those accounts," says William McLimans, senior vice president of cash management for Fidelity Investments.
McLimans advises cardholders to make sure that the rewards program won't let them exceed the yearly $5,000 investment limit on IRAs for account holders younger than 50 and the $6,000 yearly limit for those ages 50 and older.
There are no limits on yearly 529 contributions. However, single account holders who contribute more than $13,000 per year or $65,000 over five years (or $26,000 and $130,000, respectively, for married couples) will have to pay a gift tax on their contributions, according to the Internal Revenue Service. Fidelity currently prevents cardholders from exceeding their yearly contribution limits, but Upromise does not.
If you're considering a credit card that's linked to a 529 plan, Hohler recommends investigating where the 529 plan is held when considering where to stash your reward points.
"Anybody who's looking to save within a 529 should always look at their state plan first," she says.
On top of offering federal tax incentives, many 529 plans offer state tax deductions or credits for residents who invest. For example, Upromise currently administers 529 plans in 17 states while Fidelity operates them in four states. Cardholders who live outside of those states should carefully compare tax incentives offered in their resident state's 529 plan with the plans offered through the credit cards.
Rewards Aren't Enough
To maximize their rewards, investment card holders should be sure to pay off their balances each month to avoid having their cash incentives eaten by rolling card balances, Ulzheimer says. He also reminds consumers that investment-rewards cards are meant to boost savings, not replace a cardholder's savings strategy.
"It's certainly not something that should be used in lieu of normal retirement investing, but it is nice to stick another $50 in here, $50 in there," he says. "If someone, frankly, is using this as the way to fund their retirement and it's the only way, he's going to be in for a rude awakening when it comes time to actually stop working."