One of the great things about credit cards is that consumers typically don’t have to pay for the convenience of using them at the point of sale. You usually swipe your card, and the merchant bears the 2%-3% transaction fee that covers the cost of processing the payment.
Merchants are actually permitted by law to pass those costs on to consumers in the form of a credit card surcharge, except in the handful of states where such surcharges are illegal. But in reality, most retailers don’t do that for fear of alienating customers.
There are exceptions, though. Some utilities tack on a fee if you want to pay with a credit card. The IRS and universities do the same. Sometimes these fees are a flat amount, say, $3-$5. Other times they’re a percentage of the purchase price, often 2%-4%. That means that even people who use cash back credit cards or travel rewards credit cards choose an alternate form of payment because the fees are larger than the rewards they’d earn.
There are times, however, when it may make sense to pay a fee to use credit. Understanding these situations can save you money and headaches. Here’s a rundown of the situations where paying a flat convenience fee or a percentage of your purchase can make sense.
The rewards you’re earning are worth more than the fee
One of the most common scenarios where it makes sense to pay a fee to use your rewards card is if the rewards you earn are worth above and beyond the fee you’re asked to pay.
For example, let’s say you’re considering paying your federal tax bill with a credit card to earn rewards. The IRS offers three payment processors you can use to pay your bill with credit, the cheapest of which charges a 1.87% fee with a minimum fee of $2.59.
If you owed $5,000 in federal taxes and used a card that offered only 1% cash back, you would pay $93.50 to use your credit card but only earn $50 in cash back.
But if you used a card that offers 2% cash back to pay your federal taxes, you would earn $100 in cash back, which would be more than enough to cover the $93.50 fee.
It would make even more sense if you earn rewards that are worth quite a bit more than the fee. For instance, some experts value United Airlines frequent flyer miles at 3-4 cents each when used for international business class award tickets. If you’re planning such a trip on United, it’s probably worth it to pay your taxes on a United credit card. (See also: Which Airline’s Frequent Flyer Miles Have the Best Value?)
You’re under the gun to earn a big sign-up bonus
Regardless of your credit card’s ongoing rewards rate, there’s another situation where paying a fee to use a credit card could make sense: When you’re pursuing a big sign-up bonus.
While all rewards cards vary, there are many that offer $500 or more worth of travel rewards after you spend $3,000 or more within the first three months of opening the card. In the scenario above, paying a $93.50 fee to use a credit card to pay your federal taxes could be worth it if you didn’t think you’d otherwise make the spending requirement before the deadline to earn your sign-up bonus.
Of course, you don’t have to pay taxes specifically to earn a sign-up bonus. You can use your rewards card for shopping, bills, gas, insurance, and all other purchases you make. As long as you meet the minimum spending requirement within the time frame listed in your card’s terms and conditions, you’ll earn the sign-up bonus whether you pay a fee to use the credit card or not.
You want to take advantage of another credit card benefit
Finally, there are purchases where you may want to take advantage of your credit card’s legal protections or other benefits. For example, let’s say you hire a contractor to remodel your bathroom. Your contractor charges a 3% fee to use your credit card, but you think it’s worth it. Why? Because using a credit card allows you to file a “chargeback” if your contractor messes up your remodel and refuses to refund your money.
Chargebacks are covered under the Fair Credit Billing Act, which set up guidelines to govern the process for consumers to dispute a credit card charge. With a chargeback, your credit card issuer can remove a charge from your statement if it’s fraudulent, made in error, or if the merchant did not deliver what was promised. If you paid for the remodeling job with cash or a debit card, on the other hand, you would have to try to get your money back some other way.
There are other benefits your card may offer that make a credit card surcharge worth it. For instance, many credit cards offer extended warranties that add up to a year onto the manufacturer’s existing warranty. These warranties can save you hundreds of dollars in repair or replacement costs, and third-party warranties often cost more than $100 themselves. In those cases, if you’re asked to pay a surcharge to use your credit card, it may be worth it.
When it doesn’t make sense to pay a fee
While these situations may make paying a fee to use a credit card perfectly reasonable, there are situations where using credit never makes sense.
The rewards you earn are worth less than the fee
If you’re earning credit card rewards for a purchase but the fees to use credit outweigh the value of your rewards, then you should try to use cash or debit instead. Remember, rewards are only valuable when they’re worth more than you’re paying to get them.
One example is my Vectren gas bill. During the warm months when my gas bill is only around $25, I don’t pay the $1.95 flat convenience fee to use a credit card. But during winter months when my gas bill approaches $200 for the month, it makes sense to pay the $1.95 fee with a card that earns 2% cash-back. Why? Because I would earn $4 in rewards in exchange for paying a $1.95 fee.
You can’t pay off your credit card balance in full at the end of the month
Whether there’s a convenience fee involved or not, you should never go into debt just to earn credit card rewards. In most cases, the interest you’ll pay by carrying a balance far outweighs the value of any rewards you receive. You’re better off saving up until you have enough money to make your purchase and then using cash or debit to pay.
If you do have to pay with a credit card and carry a balance, apply for a low-interest credit card and forget about rewards until you’re debt-free.