Editorial Policy

How Taxes Can Help You Snag a Sign-up Bonus

Eva Norlyk Smith Ph.D.

February 25, 2013

QHi Eva,

I just got a Chase Sapphire card, and it gives me a 40,000-point bonus if I spend $3,000 in the first three months. I owe about $1,000 in taxes. Should I pay my taxes with the card? It would really help me get that bonus, because I've only got a month left to earn it, I'm at just under $2,000 now, and I can't think of any other big expenses I'll have this month that would get me to $3,000. — Simonne

ADear Simonne,

Credit card bonus offers increasingly come with strings attached, so your conundrum is a common one. In the old days, sign-up bonuses on rewards cards were typically awarded after the first purchase. Now, rewards bonus offers may be more generous, but many come with onerous minimum spending requirements.Ask Eva

Paying taxes with your credit card will cost you extra fees, but at the same time, it makes sense to spend money if it lets you make money. You can do a simple cost-benefit analysis by answering two questions: First, how much will it cost you to pay the $1,000 in taxes with your credit cards?  Second, what is the value you get in return? Let's look at each of these separately.

1. Cost of paying taxes with credit cards. Paying taxes with credit cards is a fairly easy process. The IRS accepts payments from several third-party providers, and fees range from 1.89 percent to 2.35 percent of the amount paid. So for a $1,000 tax payment, you'll pay a relatively modest $18.90 to $23.50 fee.

2. What is the value of the 40,000 Chase Sapphire bonus points? The value of rewards points often varies according to how you redeem them. If you redeem the Chase Ultimate Rewards Points for cash or gift certificates, the value of the points is a straight 1-to-1 ratio. One point is worth 1 cent, pegging the value of the 40,000 points bonus at $400. However, if you redeem points for airfare, car rentals, hotel stays or cruises booked through Chase's Ultimate Rewards Travel Service, points are currently worth 1.25 cents, bumping the value of the rewards bonus up to $500.

So it would seem like a no-brainer to pay a $19 to $24 fee if it enables you to meet the minimum spending requirement and pocket a nice $400 to $500 bonus reward. However, before bringing out the champagne, consider the potential hidden costs. Ask yourself these questions:

1. How quickly can you pay off the balance? The Chase Sapphire comes with a 15.24 percent variable APR, so if it will take a while to pay off the balance, you'll need to consider the interest costs as well, especially if you already carry a balance on your card. Adding $1,000, means you will pay $152 per year in extra interest charges until the balance is paid off.

2. Can I pay the annual fee? The Chase Sapphire Preferred card comes with a $95 annual fee, waived the first year. If you carry that $1,000 balance forward beyond the first year, you won't be able to cancel the card to avoid the annual fee, but would have to wait until the balance is zeroed out. Between interest costs and the $95 annual fee, that would put your yearly costs for that nice rewards bonus at $247. You may be planning to hold on to the card and pay the annual fee anyway, but again, it's something to consider.

3. What's the effect on my credit score? Carrying a balance on your credit card may affect the credit utilization component of your credit scores and damage your credit. Because you got approved for the Chase Sapphire Preferred rewards card, I will assume that you have excellent credit. So you also likely have a high enough credit limit that a $1,000 charge won't seriously increase your credit utilization.

However, if you already carry a balance on the card it's a different story. Do the math to make sure your credit utilization stays under 30 percent of the credit limit, if you will carry forward the $1,000 additional charge for more than a month.

Again, if you plan on paying that $1,000 off right away, none of these issues is relevant. As you can tell, though, there are many ways that even an obvious good deal like spending $19 to $24 to earn $400 to $500 can backfire.

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