It can be thrilling to chase credit card rewards. When you use a travel rewards credit card, you earn points and miles that you can redeem for a free trip. And when you use cash back cards, you’re essentially earning a nice little refund on your purchases.
Making big purchases on your credit card is one way to rack up points quickly. A home remodel or wedding can cost tens of thousands of dollars, and as long as you’re not spending extra just to rack up rewards, using a rewards credit card can be a way to defray those large costs.
This strategy can be more complex than you think, however. Here are six things to think about before making a large purchase for rewards.
1. Will the merchant accept credit cards?
Before you can even consider using your credit card to make a large purchase, you have to find out if the store or vendor will even accept them. Every time a merchant accepts a credit card, it must pay the processor a merchant fee of about 2% to 3% of the transaction. Understandably, this makes many companies hesitant to accept credit cards, especially for their largest sales.
For example, home improvement contractors often won’t accept credit cards because they know that the merchant fees will directly impact their bottom line. You may, however, be able to work out a deal where you can, for instance, buy some of the project supplies with your credit card from a home improvement store. It never hurts to ask. (See also: Best Credit Cards for a Home Renovation)
Some car dealers might also have policies preventing you from using your credit card to pay for a vehicle, while others may allow you to use your credit card for a certain percentage of the transaction and use cash or other financing for the rest of the sale. (See also: Should You Buy a Car With a Credit Card?)
Finally, double check that the merchant is part of your rewards card’s payment network. For example, some merchants don’t accept American Express.
2. Will the company impose a surcharge to use your credit card?
Some companies are happy to accept credit cards for large transactions, but they will impose a surcharge that will cost you more than any rewards that you might earn. For example, it’s not uncommon for companies to impose a 3% to 5% surcharge on credit card transactions, and bury that information in the fine print of the agreement. And conveniently for the companies that do this, their surcharges are often in excess of their credit card processing fees, allowing them to make a profit.
Thankfully, there are 10 states where it’s actually illegal to add a surcharge to a credit card transaction. If you are doing business in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, or Texas, and a merchant is adding a surcharge to credit card transactions, you might want to inform them that the practice is illegal. If you are polite about it, the merchant may reconsider its surcharge and let you pay for your purchase with a credit card at no additional cost. Just be aware that the government and publicly regulated utilities are often exempt from the laws prohibiting credit card surcharges.
3. Does the company offer a cash discount?
Most states allow merchants to offer a cash discount on the advertised price instead of imposing a credit card surcharge. And even if a cash discount is not expressly advertised, you might be able to negotiate one before using your credit card, especially if it’s for a large purchase. If the value of your discount is greater than the rewards you could earn, then it can be better to use cash.
4. Will the card issuer approve the charge?
Once you’ve figured out that the merchant will accept your credit card, you should double check that your card issuer will authorize the charge. Not only do you need to have a large enough line of available credit, but even if you do, a card issuer might flag an unusually large purchase as potentially fraudulent. For these reasons, it’s a good idea to inform your card issuer in advance of a large charge, so they can make a note in their systems to expect it.
And if you would like to make a purchase in excess of your current credit limit, you may be able to do so if you call your card issuer. It may grant you a credit limit increase, or, if you’ve got more than one credit card from that issuer, it may be willing to move a portion of your credit limit from one card to another.
5. Will you be able to avoid interest by paying your balance in full?
Whether your purchase is large or small, it only makes sense to chase rewards when you can avoid interest charges by paying your entire statement balance in full. When you’re incurring interest on your debts, then your first priority should be to save money while paying it off.
Rewards cards tend to impose higher interest rates than cards that don’t offer rewards. So if you know you’ll need to run a balance to pay off your large purchase, your best strategy is to use a card with a low interest rate or a card with 0% APR on new purchases for a promotional period. These cards tend to offer skimpier rewards, if any, but the interest you’ll save should more than make up for the lack of rewards. Forget about rewards until you’re in a place to pay off your balance in full every month. (See also: Fastest Way to Pay Off $10,000 in Credit Card Debt)
Other options are to delay the purchase until you have saved up enough money to pay for it without incurring debt, or seek other low-interest forms of finance.
6. How will this purchase affect your credit?
A large portion of your credit score is determined by your credit utilization ratio — the amount of debt you have compared to how much credit you have available. Even when you pay off your statement balance in full, that balance is reported to the major consumer credit bureaus as debt for the month, and that can have a temporary impact on your credit score.
If you have an excellent credit score and a large amount of available credit, then you shouldn’t expect much of an impact. But if you have a limited amount of credit, then consuming it with a large purchase could cause your credit score to drop dramatically. One way to avoid this is to make a large payment before your statement period ends. Doing this will reduce your statement balance and its impact on your credit score.