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:

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.