Photo: Flickr / MattHurst
Here’s a smart thing to do: Use your credit card rewards to save for your child’s college education.You can earn 2 per cent on your purchases with the Fidelity Investments Rewards American Express credit card and the Fidelity Investments 529 College Rewards American Express credit card.
Upromise World Mastercard issued by Barclay’s Bank (formerly Bank of America) offers rewards of up to 8 per cent on different categories.
You can earn up to 8 per cent when you use your Upromise Mastercard at participating restaurants. You can earn up to 5 per cent on retail purchases you make with through Upromise.com, up to 3 per cent back on gas, 2 per cent cash back at movie theatres, and 1 per cent back on all other purchases.
Once you’ve accumulated at least $25 in rewards, they can be swept into a 529 college savings account where your money grows for education expenses tax-free.
‘Every little bit helps’
Granted, even at 5 per cent rewards you’d have to buy an awful lot on your investment credit cards to make a dent in college tuition.
Charges for in-state students at public four-year colleges, including tuition, fees, room and board averaged more than $17,000 for the most recent school year, according to the New York-based College Board. At private, nonprofit four-year schools, costs averaged more than $38,500.
“You’re certainly not going to be able to fund your kids college education this way,” says Atlanta-based Beverly Harzog, credit card expert author and consumer advocate. Even if you charge $12,000 a year, at 2 per cent that’s only $240. “Enough to buy a book, maybe, two,” Harzog says.
Still, Harzog believes, every little bit helps. “It’s not bad. It’s just another tool you can use to fund your child’s college education. And if it’s money you’re spending anyway, why not?”
Even family and friends can help
Personal finance columnist Liz Pulliam Weston likes investment credit cards because their rewards rate is typically quite generous. “Anytime you’re above 1 per cent, you’re doing well,” she says. They don’t have annual fees and don’t limit the rewards you can earn.
Another good feature of rewards credit cards and 529 savings plans: You can get family and friends to help.
Everyone with a Fidelity Investment 529 AE credit card can deposit his rewards in the same 529 account. Relatives who sign up with Upromise can make purchases that earn rewards for a select 529 account. “If you have aunts, uncles or grandparents willing to do that, it’s something to check into,” Harzog says. “You can accumulate more money faster with everyone contributing.”
Watch for catches
But there are some caveats and a little buyer beware to using rewards points for college bills.
First, for the rewards credit cards to work, you have to be disciplined. You don’t want to carry a balance on these cards. “If you’re paying 12 per cent to 20 per cent interest on your purchases, you’re more than wiping out your rewards,” Harzog says. “It’s not free money when you’re paying interest.”
Second, if you want your money to go to your child’s 529 account, you have to establish one – and not just any 529 account. Fidelity requires that your 529 account be established with Fidelity Investments. Upromise earnings must be swept into a Upromise Investments-administered 529 plan.
“If you don’t already have a 529 account with the favoured provider, you’ll have to decide if it’s worth the hassle to sign up with another plan,” Weston says.
Your home state might offer a 529 plan that provides you with more favourable state tax or other benefits than the ones tied to the credit cards. Remember, too, money from a 529 account can only be used for qualified expenses. Qualified expenses include tuition, certain room and board costs, and required fees, books and supplies.
Any rewards program can work
You can use credit card rewards to fund your child’s education even if you’re not interested in opening a 529 savings account, Harzog says. “It doesn’t have to be a card tied to a specific brokerage account.”
One of Harzog’s favourite rewards credit cards is the Chase Freedom, where you can earn 5 per cent cash back in different categories. Some months it’s grocery stores and department stores. Some months it’s gasoline and restaurants. She also likes Discover’s cashback rewards card.
You could take the cash back you earn on your rewards credit card and deposit it into a savings account that you have earmarked for all college expenses. Then, Harzog says, when your daughter’s car breaks down on her way back to campus, you have the funds to pay for the repairs.