By Dr. James M. Dahle, WCI Founder
Most of you are very familiar with the various ways to make money with credit cards. The big bang for your buck is sign-on bonuses. However, that also comes with the greatest hassle, as you're constantly opening and closing accounts. The less impressive, but more consistent option is to put all your spending on credit cards that pay you 1%-5% back. We occasionally do some of the former and regularly use the latter. Almost all of our spending goes on our Fidelity Card, which gives 2% cash back directly into our Fidelity account. We buy gas on a PenFed card, which applies 5% cash back directly to the balance each month. Minimal hassle, and several thousand per year free.
In order to really get a lot of benefit out of these cards, you have to spend a lot on them. Two areas where docs spend a lot of money, but may not have realized that they could use a credit card, are student loan payments and tax payments.
Student Loan Payments
A reader wrote in with this explanation of how he has been paying his student loans off with his credit card:
In order to make credit card payments on your loan with Navient you need to be enrolled in autopay (you get a .25% interest rate reduction with this as a bonus.) Unfortunately, the amount you have deducted through autopay each month cannot be charged to your card, it must come out of your checking or savings account. However, if you call each month, a week before the autopay comes out you can make an additional manual credit card payment with no charge. There must be an amount due balance at the time you do this, so that is why you do this a week before your autopay withdrawal. Also, the additional credit card payment must be less than the autopay amount. If your autopay is $1200.03, then you just charge $1200.02 it will be fine.
Obviously, you have to do this each month which is slightly annoying. Also you must check frequently that your additional credit card payment did not make you “paid ahead” which will mess up some things for next payment because it will not show an amount due since you are “paid ahead.” It happened only once to me, but the remedy is to call and have your payment counter reset so it shows that you have an amount due. Once in a while I had to reassure the agents that a credit card payment was allowed. They quickly asked a manager and all was good.
Originally my wife and I we were both in a 10 year repayment plan so the autopay each month was quite high. Therefore, if I added on two additional credit card payments close to the autopay amount it would set me over my budget. So what I did was change both of our terms to a 20 year repayment plan, making the monthly autopay smaller. Then I just made a credit card payment equal to a penny less than the autopay. This additional payment plus the auto debit effectively put me right back into a 10 year plan; I just had more freedom to change my monthly credit card payment.
I did this with great ease for over a year for both my loans and my wife's loans and did it in the same phone call (making a credit card payment to my loans then switching to my wife's account to make a credit payment on her account. I racked up over 50,000 credit card points that year. This is very useful for credit cards which need you to hit a certain amount of spending in the first 3 months to get a point bonus, such as Chase Sapphire Preferred, which also gave me 40,000 additional points for signing up. I have not yet found a card that gives double points for loan payments but maybe a reader will know.
I understand this is quite long and convoluted but for points hobbyists like myself I found it quite interesting. As I mentioned before I kept my discovery quiet, because I feared that they would start charging for credit cards if too many people attempted this. However, I just refinanced my loans and my wife's loans with SoFi (7 year variable at 2.5%.) Sofi will not allow me to continue racking up points like this so I figured I would spread the word.
The secret is out. Take advantage while you can.
I recently started making my quarterly estimated taxes using my credit card. Given how well the website has done, those payments have become, well, rather massive. I suspect I'll be paying at least $200K in federal taxes this year. Unlike the scheme above, there is a charge to doing this. However, that charge is 1.87%. As noted above, my Fidelity card pays me 2% back. So that leaves 13 basis points that go into my pocket, tax-free (it's treated as a refund tax-wise, not income). 13 basis points on $200K is $260.
But wait, there's more. I also get the use of that money for an additional 6 weeks or so. Assuming I'm earning 1% on it (easy to do in my high-yield savings account), that's another $230 a year. Sure, $500 isn't super crazy awesome money, but since it is EASIER and MORE SECURE to pay via credit card than via check, WHY NOT? I'd probably do this even if the fee was 2%.
But WAIT, there's more. That fee may even be tax-deductible as a tax preparation/payment expense (totally legit per the instructions for Schedule A lines 22/23.) Granted, that one is subject to the 2% floor, so it might not be worth much to you unless you have a lot of investing expenses, which I hope you don't. Even a $4K fee isn't going to lower my taxes any.
One hassle you might run into is your credit card limit. For example, consider the month of April. I have all my regular expenses, plus my quarterly estimated payment for federal taxes. Plus, if I underpaid last year (as I usually do) that final payment is due. Here in Utah, we also pay our state taxes all in April of the next year, since there is no penalty for the self-employed to do so, but the convenience fee on their site is a little over 2%, so I probably won't put that on the card. At any rate, all those taxes can add up to more than your credit card limit.
However, I have found that if you have income high enough to owe large tax payments, you probably have income high enough to get a very high credit card limit. Every time I call to raise my limit, the first question isn't “how much do you make” (that's the second one) it's “how much do you want?” And, like getting a mortgage in 2006, nobody seems to really care enough about the second question's answer to do any kind of real verification. (No, I'm not telling you to lie, just realize an estimate is fine.) Also, putting that kind of a load on your credit card is going to lower your credit score a bit, so don't do this kind of silly thing if you need to get a mortgage soon. But my goal in life is to get into a position where I don't need a credit score anyway (although I've noticed insurance companies are starting to use your credit score for some stupid reason).
Again, I don't know how long this deal will last, but it's worth a few hundred bucks a year to me anyway.
What do you think? Would you consider paying your student loan payments or taxes with a credit card? Why or why not? Comment below!