When to Avoid Credit Card Transaction Fees
If you’re like me, you use your bonus credit card for almost every purchase to earn points or cashback, and you might not really be thinking about it. But it’s not worth flashing plastic for every transaction, as some merchants may charge a transaction fee that negates your rewards, or worse, ends up costing you more than just using a check, cash, or debit card.
When to avoid transaction fees
Transaction fees for credit card purchases are typically 3%, but typically range from 1 to 4%, which is between one and four cents per dollar. There are times when you should avoid these fees, but there are times when it’s worth it, as your bonus card bonuses may still exceed the cost of the commission and provide more total value compared to using cash or debit. The trick is to find out how much your points or cashback percentages are worth and compare that to the commission.
Do math
For example, suppose a restaurant insists on a 3% transaction fee, which means that you lose three dollars for every hundred dollars spent just using your credit card. Now, if you used your Bank of America Cash Rewards card, you would only get 2% cashback for lunch, which will cost you 1% of the transaction. It’s like paying three dollars to get two dollars off – obviously not worth it.
Points or miles get trickier, but the idea is the same – make sure you get more points or miles than what you pay in commission. The only problem is that not all points are the same and they differ in the redemption value. This is why Points Guy ratings are so convenient as they give you an estimate of the monetary value of the points and miles of each reward card, which can help you calculate the true value of your bonus rewards.
For example, a card that offers seven bonus points for every dollar spent sounds impressive, but if the monetary value of each point is only 0.4 cents, you’re looking at only 2.8 cents total value for every dollar spent. In contrast, another card that offers three bonus points for every dollar spent, worth two cents each, will give you a total value of six cents – whichever is better.
This is why you want to know the estimated value of your card points first, and then you can compare it to the transaction fees, which, as mentioned, will range from one to four cents per dollar. If the amount in points exceeds the amount of the transaction, you will find out if it is worth using the card.
Welcome bonuses are an exception
The only exception to this rule would be when you need to use your credit card to achieve some kind 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 to $ 2,000 in total, so they are definitely worth ditching the recurring transaction fees, assuming you can pay off the balance as soon as you reach your spending target.