These high rate of return reward programs seem like an attractive option, with brokerage firms offering a high percentage rate of " cash back" rewards on all purchase made with the credit card. However there is a catch! In order to redeem the rewards, the card must be linked to a brokerage or an investment in the associated financial institution.
Individual Retirement Accounts
There are various types of investment tied credit cards available on the market, and as always it is worth doing some research before making a decision about which card is right for you.
In most cases the reward points earned on your credit card transactions can be redeemed for cash deposits into an investment program by the brokerage, such as an IRA (Individual Retirement Account) or some other investment account. In some cases your credit card issuer will make these deposits automatically.
This can be a useful way to save for the future, although investors should be aware that with credit cards linked to a retirement account, you will face penalty fees if you wish to withdraw cash prior to the agreed retirement age placed on the plan. This type of credit card offers a long term reward program, not an instant cash back option.
College Fund Rewards
College reward cards are also a popular option for credit card tied to investment. In a similar scheme to retirement plan cards, reward points are redeemed for cash deposits into a college fund for your son or daughter. There is an additional benefit, in that many lenders will also allow friends or family members to tie their credit cards to the same investment fund.
This means that grandparents and other relatives can also use their credit card transactions to contribute to your son's or daughter's college education. If you are going to be making use of a credit card anyway, this is an easy and cost effective way to pay for your child's education.
While college funds and retirement plans are useful, they may not be a suitable investment for everyone. A large number of brokerage firms also offer more immediate cash returns on your investment.
You should look into credit cards which automatically deposit your rewards into an account which you can then withdraw cash from in order to purchase stocks and shares, or to buy into another type of investment. The brokerage firm will be happy to advise you on suitable investment opportunities, although you may be tied to investing in their own products.
Additional Fees and Charges
However, while these types of tied investment reward programs do offer substantial rewards, they are often subject to very detailed terms and conditions. Some of the new credit cards are subject to late payment fees and higher interest rates applied as a penalty for missing a payment.
There is also the possibility of losing your reward entitlement for a billing period in which you miss or delay a payment. If a transaction brings your account above your agreed credit limit you can also have fees and penalty interest rates applied to your account. These charges can often make it seem that the rewards come at too high a cost. Some cards also require that your balance be cleared each month in order to redeem the rewards.
It is essential that you be sure of exactly what the credit card agreement entails to avoid nasty surprises. However, being a model customer can reap high rewards, so do not be put off if you feel you are able to adhere to the terms laid out by your chosen credit card issuer or brokerage firm.
In conclusion, credit cards which are tied to investment funds and brokerage firms can offer substantial rewards. They can be particularly useful in saving for your retirement, or paying for a child's college education. However, you should be aware of exactly what is covered by the reward scheme and what you are expected to do in order to maintain your account.
As with any financial commitment it is important to research all of your options and perhaps seek professional advice before making a decision. If you can adhere to the terms and conditions and are looking for this type of investment, then a credit card tied to a brokerage film may be the right choice for you.