Paying off your mortgage to get credit card points requires intimate knowledge of the financial considerations of doing so. Credit card fees and interest can eat away any benefit you get from your rewards in the blink of an eye. However, some astute consumers use credit cards effectively, getting the maximum benefit from rewards programs without getting caught by their high interest rates and fees.
The Value of Rewards
The best return on your dollar for most reward programs is around 2 percent. So for example, if you have $50,000 left to pay on your mortgage, you could possibly earn $1,000 in reward points by paying with a credit card. Assuming you have a credit card with a line high enough, $1,000 might make a nice Christmas gift to yourself.
But wait. While $1,000 sounds nice, how much will that $1,000 cost you? Beware of balance transfer and convenience check promotions from your credit card company. Even a 0 percent balance transfer offer from your credit card company may require you to pay a flat fee of 1-5 percent. This means that $1,000 in rewards points might cost as little as $500, but as much as $2,500. To avoid these fees, use the payment stub on your mortgage statement to fill in your credit card number instead of using promotional offers. However, a no-fee 0 percent balance transfer offer might be a good idea if you confirm with your credit card company that you won’t pay any fees or interest for six months.
Unless you can pay off that $50,000 in six months at 0 percent, eventually, you’ll have to start paying interest on your credit card. In December 2010, the average credit card carried an interest rate of 14.45 percent. Compared to a 4.71 average 30-year mortgage rate, a balance of $50,000 would cost $7,225 annually compared to $2,355 for a mortgage loan.
Monthly payments for credit cards average 4 percent of the balance, whereas a 30-year mortgage makes payments quite a bit more manageable. On a credit card, you’ll start out paying $457. A thirty-year mortgage for $50,000 would cost only $63 monthly.
When it’s a Good Idea
There are times, however, when it might be an astute financial decision to pay your mortgage with a credit card. For example, if you already have the cash to pay off your mortgage, why not take advantage of your credit card reward programs? You can pay off the credit card before any interest is assessed, and get the rewards to boot. It might also be a good idea to pay your monthly mortgage payment on your credit card if you pay your credit card balance in full every month. This way, the rewards add up incrementally and you’ve delayed your mortgage payment for another month without incurring additional interest.
Sara Huter is a professor of economics. Her background also includes risk management in the banking and energy industries with expertise in credit scores. Huter received an M.B.A. in finance from Texas A&M University and a B.S. in information systems from Kansas State University. She has been writing for over five years with work at Popsyndicate.com, WickedWordSmith.com and Simplejoy.com.