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The 1 Thing You Should Never Pay for With a Credit Card

Like most people who don't own a home, I pay rent every month. This past Tuesday after I debited my monthly payment directly from my bank account, I got to thinking: How many rewards points could someone rack up if they paid rent with a credit card?

Source: Flickr/Cincy Project.

The crux of this decision depends largely on your rent, your credit card, and the fee that your property manager will charge you for using it. Fees for these credit card transactions are unavoidable, because they cover the amount credit card companies charge your management company for processing. Let's work through the numbers.

Many miles, for a price 
I have a card from Capital One that gives me 1.25 miles for every dollar I spend, and my property manager will charge me $40 to pay my rent with my card. My monthly rent is $1,392; add to that the $40 fee, and I'd really be paying $1,432 per month, yielding 1,790 miles. After one year of paying my rent this way, I would earn 21,480 miles and pay $480 in fees. That mileage has a dollar value of $107, based on Capital One's policy that 5,000 miles equals $25.

Now, each month I am already committed to paying $1,392 one way or the other. I have the cash on hand, so the real question here is whether all those miles are worth $40 each month. What sort of return could I expect if I put that money elsewhere?

To determine its value, let's consider some alternative options for that money. Again, $40 a month is $480 each year. Here's how its value breaks down when placed in a sock drawer, my savings account (with my actual interest rate), or the stock market:

 

Sock Drawer

Savings Account (0.75% APY)

Stock Market (6.8% CAGR)

Year 1

$480

$481.65

$480

Year 2

$960

$966.93

$992.64

Source: Author's calculations. Stock market return is based on historical data.

Realistically, the sock drawer and the savings account options would actually lose value if you factored in inflation, especially if you used them for a longer period of time -- say, 10 years. Similarly, using the stock market's historical average for a two-year period is not ideal, but these numbers do give us the answer to our question.

Forty bucks per month for two years would result in $6.93 in interest in my savings account, perhaps $32.64 in an index fund, and $214 in credit card points. The problem with the credit card points is that unlike the sock drawer or a savings account (and hopefully the stock market), you lose your entire principal. In other words, you are paying much more than you get in return, which makes no sense. You are better off paying your rent in cash and keeping that $480 in a drawer than you would be using it to earn credit card points.

If your apartment management company charges you a fee -- which it almost certainly does -- then paying your rent with a credit card is a giant rip-off.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2014, at 5:49 PM, normgarry wrote:

    The only things you should be using a credit card for are unavoidable over-the-air transactions: renting hotel rooms, renting cars, putting in reservations, etc.

    It feels to me like "points" are a trap to trick you into making more charges than you can pay off - or to get you to use services which will cost you credit-use fees.

    I only use a credit/debit card when gas stations don't charge a fee to use one. Some people I know claim they use credit/debit cards at gas stations but make the fee back with cash back. WHY DO THAT? I'd prefer to purchase from gas stations without fees and STILL collect cash back.

    Paying rent with a credit card seems logical, but if there's a fee - NO WAY!!!

  • Report this Comment On April 06, 2014, at 7:56 PM, sabebrush6 wrote:

    A credit card should only be used for emergencies or travel. Period. I use to use one credit card for travel and one for on-line purchases or at a nice restaurant because you do not want to use a debit card at a restaurant. Too many of the employees will scam you.

    I dropped my travel credit card when they elected to charge me for a non-use time which ( I vacationed twice a year) was a rippoff. I just keep one card and pay off the vacation when I get my first traveling bill.

  • Report this Comment On April 06, 2014, at 8:07 PM, FIAN2 wrote:

    w...hores

  • Report this Comment On April 07, 2014, at 4:28 AM, portifoy wrote:

    if you really want to stay safe and save money, then for god's sake don't rely or believe any of the garbage on Motley Fool. written for first graders by first graders. motley is by far the most amount of crap by the least educated morons on the planet.

  • Report this Comment On April 07, 2014, at 6:47 AM, moopert wrote:

    1 thing you should never use a credit card on... anything. Ever. Pay cash for everything. You'll never see a car salesman bend over backwards so fast as when you show him a bank statement saying you have $25,000.

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