Does it make sense to use a cash-back credit card to help save for college? It can, for consumers with the discipline to pay off their card balance each month.
A small number of credit cards offer cash-back rewards that can be deposited directly into a 529 college savings account, the popular state-sponsored accounts that offer tax advantages.
The cards include the Fidelity Rewards Visa Signature card, which offers 2 percent cash back when the reward goes into an eligible Fidelity account, including one of the Fidelity-managed 529 college plans.
The card does not restrict the rewards to specific spending categories and sets no limit on the amount of rewards that can be earned.
Others include the CollegeCounts 529 Rewards Visa card for participants in Alabama’s 529 plan and the Bright Directions 529 Rewards Visa card, for participants in the Illinois program. The cards, issued by Union Bank & Trust, offer 1.529 percent back. The Bright Directions website estimates that a family spending $2,500 a month would earn $458 a year in cash-back savings.
The Upromise MasterCard, offered through Sallie Mae’s Upromise college savings program, offers a range of cash-back rewards, depending on where you shop and what you buy.
Users can potentially earn as much as 10 percent back, Upromise says, if they shop with the card on Upromise.com, an online hub for participating merchants. The cash rewards can be swept automatically into many 529 accounts.
Part of the cards’ attraction is the automatic savings that they offer, said Nicholas Clements, co-founder of the financial website MagnifyMoney.
The idea is that you can go about your business using the card, and the reward dollars will help your college savings grow without you having to think about it.
You could, of course, use general cash-back credit cards, and deposit the savings yourself into a 529 account. Some general cards, however, have various rules to follow to maximize their benefits.
They may offer 5 percent back, but only during certain periods and on certain categories of spending, like gasoline or meals at restaurants.
And in addition to keeping track of when to use the card, you must also remember to move the savings into your college account.
“When you automate something,” Clements said, “the likelihood of doing it increases dramatically.”
Here are questions about saving with a cash-back credit card:
Q: Failing to pay off the balance in full each month can quickly defeat the purpose of getting cash back, because the cards carry double-digit interest rates. Generally, if you carry a balance, Clements said, “you’ll pay more in interest than you will ever earn in cash back.”
Cash-back credit cards, like all credit cards, should be approached with caution, said Bruce McClary, a spokesman for the National Foundation for Credit Counseling.
As long as users limit charges on the card to their “normal” spending and earn the reward as an extra benefit, cash-back cards can help bolster college savings. “They’re a great tool, if you use it wisely,” he said.
But if you are tempted to max out the card just to feed the savings account, the cards are counterproductive and may saddle you with debt you cannot handle.
Q: What 529 accounts does the Fidelity cash-back card work with?
Fidelity manages four 529 savings programs, in Arizona, Delaware, New Hampshire and Massachusetts.
Q: If I use multiple cash-back cards, how can I keep them straight?
Clements noted that you could potentially save at higher rates by obtaining multiple cash-back cards and making sure to use them in the right category.
If you do, he suggested buying little colored stickers for the cards in your wallet to remind you when to use them, like dining or buying gas or groceries.