by Value Penguin
In Singapore, two startups have been receiving a lot of attention by allowing consumers to use credit cards to pay for big-ticket expenses like rent and income tax. While the prospect of earning miles on your rent payment may sound attractive, however, paying rent with a credit card is actually quite expensive and not worth pursuing for most consumers. In fact, you're likely to walk away losing money by paying rent or income tax with a credit card even if you factor in any potential rewards you may earn. Here, our team at ValuePenguin discusses the details of how using a credit card to pay rent actually works, why it's not financially beneficial, and a few specific scenarios where the credit card rewards are large enough to make it worth while to pay with card.
Should You Pay Rent with a Credit Card?
In most cases, you should not pay your rent with a credit card. This is because the cost of doing so far outweighs the potential rewards. For example, the average cost of making a rent payment through a credit card is 2.6% of the total payment amount. Therefore, if the tenant pays S$1,000 per month, he can expect to pay S$26 for the convenience of using a credit card. Of course, should the cardholder not fully pay off their credit card balance at the end of the month, he will incur additional charges in interest, which can be quite high around 25%. In comparison to these costs, however, the rewards from using a credit card are much more limited.
The main benefit of paying your rent with a credit card comes from earning credit card rewards. While these rewards are quite generous, they actually aren't big enough to offset the 2.6% fee charged by CardUp or iPaymy. For example, even the miles credit cards offer 1.2 miles per S$1 spent. Given that a mile is roughly equivalent to S$0.01 for economy class tickets, this represents recuperating less than half the cost of using a card to pay rent. While cashback credit cards tend to come with higher reward rates of at least 3% to 5%, they often limit the amount of rebates one can earn in a given month to S$50 to S$120, making them not ideal for paying for large expenses like rent.
Exception to the rule: credit card sign-up bonuses
Credit card sign-up bonuses are the only exception to the above, since some credit cards require a pretty high amount of spending to qualify for their sign-up bonuses. If you need to use a rent payment to hit the requirements for a sign-up bonus, you are likely to walk away with more in return than the fee took out. Most cash back and mile bonuses are generally worth around S$100 to S$200. Therefore, if all you’re paying is a S$50-S$80 fee, you will still be benefiting from the transaction.
For example, Citi Premier Miles Card rewards 15,000 bonus miles for those who spend S$10,000 within the first 3 months of getting the card, on top of the 1.2 miles per S$1 on that spent. If you charge extra S$1,000 of rent on your card for 3 months to meet this requirement, you would have incurred S$78 in processing fee to earn S$186 worth of miles (15,000 bonus miles + 3,600 miles from 1.2 miles per S$1). However, it's also worth noting that this should be a last-ditch effort to earn your bonus. Earning bonuses by making traditional purchases is still always preferable because it will not be eating away into your total returns.
Don't Max Out Your Credit Card with Rent Payment
There's another hidden cost of using a credit card to pay your monthly rent: hurting your credit score. Credit bureaus use a factor called "credit utilisation" to calculate your credit score. This measures the percentage of your total credit line that you utilise month-to-month. Essentially, credit bureaus generally conclude that people who consistently max out their credit limit deserve lower credit scores than those who don't. While there is no clear consensus, most experts agree that using more than 60% of your available credit limit can hurt your credit score. Therefore, people who are concerned about their credit score should be careful and think twice before deciding to pay their rent with a credit card.
For most daily purchases, using a credit card to pay is usually good because the price is the same whether you pay with cash or card. However, this isn't the case when it comes to paying rent or your income tax. Because these expenses usually aren't paid with cards, their prices tend to preclude the 2-3% fees charged by credit card companies. Therefore, you should think twice before using a card to pay your rent just because some startups say you can do so to earn more bonuses. In most cases, doing so will just inflate your costs. Instead, traditional modes of payment like checks or online bill pay are much more suitable methods of paying your rent or income tax.
Furthermore, this is another good lesson for consumers who want to be more savvy about their financial decisions. A lot of claims made by for-profit companies can often distort the reality to create an alluring facade to draw your interests. However, they may not always present the full picture that one should consider before actually making a purchase. As always, before making any big financial decisions, it would be wise to do your own research.
This was first published at Value Penguin's website, "Should You Pay Your Rent with a Credit Card?"