[Update: Some offers mentioned below have expired. For current terms and conditions, please see card agreements. Disclosure: Cards from our partners are mentioned below.]
There are currently several credit cards that allow you to use your cash-back rewards to pay your mortgage. These include the Wells Fargo Home Rebate card, and all of the Citi cards that earn ThankYou points. Additionally, the Upromise and Sallie Mae cards from Barclaycard US allow you to use cash back rewards to pay down student loans. Now Wells Fargo is planning to introduce similar products that deliver cash-back rewards toward car or student loan payments.
Is This Good for Cardholders?
Wells Fargo has indicated that it is moving in this direction in order to encourage its customers to increase their credit card use. In addition, it hopes that these new products will appeal to consumers who have grown wary of taking on debt.
Even if this strategy proves successful for Wells Fargo, will consumers be better off using a credit card that directs all rewards toward loan repayments?
Here are a few things that cardholders should consider before committing to this strategy.
Are you carrying a balance?
As with any rewards card, those that pay down debt will have a higher interest rate than cards that offer no rewards. Furthermore, it makes little sense to pay down debts such as a mortgage or car loan with a relatively low rate, while carrying a balance on a credit card with a higher rate.
Are you receiving a competitive rate of return?
The Wells Fargo Home Rebate card returns a strong 3% rebate for purchases at gas stations, groceries and drug stores, but only for the first six months after opening an account. After that, all purchases receive only 1% cash back. In contrast, Capital One recently introduced its Quicksilver card that offers 1.5% cash back on all purchases.
Is loan repayment the best use of your cash-back rewards?
In most instances, consumers are right to avoid debt and repay their loans as quickly as possible. Nevertheless, there are times when it makes more sense to invest money. For example, many homeowners received extremely low interest rates in the past few years and can now earn higher rates of return on their investments than they are saving on interest payments. The fact that taxpayers can deduct interest from most home mortgages and some student loans further reduces the savings generated by early repayment. Furthermore, the Fidelity Rewards American Express card offers 2% cash back as payments towards qualifying investment accounts in their brokerage. This is double the rate of the Wells Fargo Home Rebate card.
Are you disciplined enough to make additional loan payments?
If you are able to find a cash-back card with a greater rate of return than a card that directly repays the loan, you can simply make loan payments using those funds. One way is to track your cash-back rewards each month and make an identical loan payment. Another is to estimate your annual rewards and set up a payment plan that represents your average month’s rewards.
It is nice to see banks using their creativity to offer innovative products designed to help cardholders reduce their debt, not increase it. But before cardholders jump on this bandwagon (or stagecoach), they should consider all of the advantages and disadvantages of these products.