If you’re like me, you use your rewards credit card for almost every purchase to earn points or cash back, and you might not really thinking about it. But not every transaction is worth flashing the plastic, as some vendors might charge transaction fees which negate your rewards, or worse, end up costing you more than just using a check, cash, or a debit card.
When to avoid transaction fees
Transaction fees for credit card purchases are usually 3%, but they typically range between 1-4%, which works out to one to four cents on the dollar. There are times when you should avoid those fees, but there are also times when it’s worth it, as your rewards card bonuses might still exceed the cost of the fee and provide more overall value compared to using cash or debit. The trick is to know what your points or cash back percentages are worth, and compare that against the fee.
Doing the math
For example, let’s say a restaurant insists on a 3% transaction fee, which means you would lose three bucks on every hundred dollars you spend, just for using your credit card. Now, if you were to use a Bank of America Cash Rewards card, you’d only get 2% cash back on dining, which is costing you 1% on the transaction. It’s the same as paying three bucks to get a discount of two bucks—obviously not worth it.
With points or miles it gets more complicated, but the idea is the same—make sure you’re getting more value in points or miles earned than what you’re paying as a fee. The only problem is that not all points are the same, and they vary in terms of redemption value. This is why the Points Guy’s valuations are so handy, as they give you a cash-value estimate of each reward card’s points and miles, which can help you calculate the true value of your reward perks.
As an example, a card that offers seven rewards points per dollar spent sounds impressive, but if the cash value of each point is only 0.4 cents, you’re only looking at 2.8 cents in total value for each dollar spent. In contrast, another card offering three rewards points per dollar spent, valued at two cents each, would give you six cents in total value—which is better.
This is why you want to know the estimated value of your card’s points first, then you can compare it to the transaction fee, which, as mentioned, will vary from one to four cents on the dollar. If the value in points exceeds the value of the transaction, then you’ll know whether it’s worth using the card.
Welcome bonuses are an exception
One exception to this rule would be when you need to use your credit card to achieve some sort of spending goal, like a hefty welcome bonus that requires you to spend a certain amount of money in a short period of time. These bonuses can range from $1,000–$2,000 in value, so they’re definitely worth forgoing the occasional transaction fee, provided that you’ll be able pay off the balance once you’ve reached your spending goal.