ByANNAMARIA ANDRIOTIS
Forget the free roundtrip tickets to Florida or the flat-screen TV. When used properly, credit card rewards programs can help you pay for a far pricier purchase: college tuition.
Pay for a meal using the Futuretrust MasterCard (MA)
While such deals may sound like a great way to sock away a little extra cash toward tuition, rewards cards come with plenty of pitfalls -- including sky-high interest rates. Fidelity Investments' card carries a 16.99% annual percentage rate (APR) for purchases and BabyMint s ranges between 10.24% and 16.24%. In fact, to make sure you're saving more money for college than you're paying in interest, you ll have to pay each balance in full and on time each month, says Christine Moriarty, a fee-only certified financial planner in Bristol, Vt.
Want to get even more tuition dollars out of your card? Try these tips.
Sign Up Early
Rewards can take several years to add up so it's best to sign up for a college rewards card when a child is in elementary school or even younger.
A family with a five-year-old child that makes $4,000 in purchases each year on a card that offers 2% back on each dollar spent will earn an extra $1,040 in rewards by the time their child goes to school.
Comparison Shop APRs
Ask the credit-card issuer what interest rate they would charge you based on your credit score (they ll often give you a range). Remember that rates are usually variable and subject to change.
Check out cardratings.com and billshrink.com to compare credit-card offers.
Read the Fine Print on Rewards
Driving 20 miles out of your way to use a card at a participating retailer is probably not the ideal way to save for Junior's education. Seek out cards that offer rewards for shopping at national retailers and at shops that you can easily visit, says Curtis Arnold, founder of CardRatings.com, a credit-card comparison web site.
Also, look at the rewards the card offers. Anything less than 2% of purchases in rewards will make accumulating significant savings difficult.
Know Where the Money Goes
Many college rewards cards automatically stash whatever you earn into a 529 plan. But that convenience comes at a price. Sometimes, the credit card s issuer only permits you to open a 529 plan that they manage, which means there could be management fees or other costs involved.
Pass on plans with management fees that are higher than 1.5%, says Harold Simansky, investment advisor at Brookline, Mass.-based Simansky Investments. Also, look at the plan s investment allocation and its performance track record -- both short and long term. Keep in mind that many of these plans have taken a hit over the past several years.
You may find that contributing directly to your state s plan -- especially when the state offers a tax break, like Vermont, Colorado and Connecticut do -- could offer better savings than a rewards program, so be sure to compare the investments first, says Moriarty.
Inquire About the Card s Future
There s no guarantee that the credit card won't get canceled. In fact, many credit-card issuers are slashing their rewards programs altogether, says Arnold.
Ask the credit-card issuer what will happen to your rewards should the card get suspended. In most cases, the rewards that have been deposited in your account will remain untouched. But the outstanding rewards (those that you've earned but have yet to be deposited) could be in question.
| Card | Annual Percentage Rate | Rewards | Where the Rewards Go |
|---|---|---|---|
| * None of these cards have annual fees or impose limits on how many rewards you can earn per year. ** To receive the Upromise credit card rewards you must be a Upromise member. To sign up for free, click here. | |||
| Upromise World MasterCard** | 9.24% to 13.24% for purchases | Upromise offers two cards both of which offer 1% on most purchases and an extra 10% on purchases made at some 21,000 grocery and drugstores. The gas and grocery rewards credit card offers an extra 2% on gas at participating ExxonMobil locations. And the dining and grocery rewards credit card offers 10% extra rewards at some 8,500 participating restaurants. Earn a $25 savings bonus after you use the credit card to make your first purchase within 90 days of opening the account. | You can set up a Upromise 529 account where rewards will be deposited or you can request to receive a check for cash. Graduates can also link their Upromise account to a Sallie Mae student loan to help them pay off their balance. Rewards are doled out once a quarter assuming you've earned at least $25. |
| BabyMint Platinum Visa | 10.24% to 16.24% for purchases | Earn 1% on nearly every dollar you spend and between 1% and 26% when you shop from more than 300 participating BabyMint retailers. | Rewards can be sent by check or put directly toward a student loan. In most cases, rewards can be deposited into 529 plans that accept payments from third parties and Coverdell educational savings accounts. Family and friends can also contribute their rewards to your account. |
| Futuretrust MasterCard | 8.99% to 14.99% for purchases | Earn 1% on all purchases and up to 10% at participating retailers. (Rewards may change at any time.) You can also earn up to 15% at restaurants throughout the country as well as discounts while dining there. | In most cases, credit card holders have to be enrolled in a 529 savings plan offered by Futuretrust or provide account information for their existing 529 plan in order to receive their rewards. |
| Fidelity Investments 529 College Rewards American Express | 16.99% for purchases | Earn two points for every $1 spent. Once you reach 5,000 points, they can be converted at a rate of 1% (or $50) into an eligible Fidelity account that you choose or you can redeem them (for a $25 check). To do the latter, click here and after you create a login, select the Fidelity rewards link. (The minimum required points to redeem rewards for cash are 2,500, which will be a $12.50 check.) | Points can be deposited into an eligible Fidelity account, which includes Fidelity-managed 529 plan accounts that accept the deposits. Or you can redeem them for cash. |
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