Credit Cards That Pay

Now you can use plastic to reduce your mortgage, save for retirement and more. Here are the details.

These days, you can earn all kinds of gifts by paying with plastic: airplane tickets, gift certificates — even cash. But some credit cards take this one step further, by actually improving your bottom line.

We're talking about cards that help you pay down your mortgage or increase your college or retirement stash. The concept is similar to that of cash-back cards: Every time you make a purchase, you get a rebate of 1% or so (depending on the program) based on the amount you paid. Instead of cutting you a check, the credit card company (or its program partner) will deposit the rebate amount directly in your investment account or 529 college savings plan, or apply it toward your mortgage principal.

These programs won't generate huge savings — but, then again, they're free, and every little bit counts. Charging $12,000 a year could generate an extra $120 added annually to your mortgage or college savings fund. Do this every year over the lifetime of a 30-year fixed-rate mortgage, and that could save $9,980 in interest on a $200,000 home financed at 6%. Or, over 18 years it could generate an extra $4,080 in college savings (assuming your account grows at 7% annually).

"To be able to save using your rebates is a pretty neat concept, and if used responsibly, it can be an incredible financial tool," says Curtis Arnold, founder of CardRatings.com, a consumer credit-card information Web site.

Of course, it goes without saying that these rewards don't justify running up a fat balance. "It's like any reward," says Arnold. "If it entices you to spend more, that's obviously a big red flag." Also, some programs allow you to earn only up to $300 or $600 a year. So if you spend more than what's required for the maximum rebate, you'd probably be better off with a program with higher or no annual limits.

And remember that these multithousand-dollar savings are only hypothetical. You may be able to shave $9,980 off your mortgage, but that's provided you use the card for 30 years — and the rewards program stays around for that long. "The credit card issuers do reserve the right to close any of these programs, and it happens all the time," Arnold says. For more drawbacks to rewards programs, see our story.

Still interested? Here are the details on three types of financially rewarding credit cards.

1. Reduce Your Mortgage
Credit card rebates that are applied toward your mortgage principal are the latest novelty in rewards programs. There are two such cards right now. Citigroup pioneered the concept in April 2004 with its Citi Home Rebate card. MBNA followed in May with its GMAC Mortgage Equity Rewards card. While the GMAC Mortgage Equity Rewards card is available only to those who have a mortgage with GMAC, the Citi Home Rebate card is available to anyone, regardless of mortgage provider.

The programs are straightforward: You get 1% back on everything you charge, regardless of where you shop or what you buy. Best of all, there's no annual cap on how many rebate dollars you can earn. "It's pretty exciting," says Arnold. "You're paying down your principal, and even if you're just an average spender, it's gong to shave off some significant finance charges (over time)."

According to MBNA, for example, if you have a $150,000 mortgage with a 30-year term and 6.5% fixed APR and charge about $20,000 a year on the card, you can save $16,975 over the life of the loan and reduce its term by 17 months.

2. Boost Your College Savings Stash
Using these credit cards probably won't help cover the entire cost of college — but they can certainly help.

By using the Citi Upromise credit card, for example, you'll get a flat 1% rebate on anything you buy. You'll also get an additional 10% rebate when you purchase Upromise-participating items (like Huggies, Coca Cola, Kleenex or Kellogg's products) at participating grocery and drug stores, and an extra 2% contribution if you buy gas at any Exxon or Mobil gas station. The annual rebate from the credit card (meaning the 1% flat rebates on all purchases) is capped at $300, but the additional points generated through the purchases of specific items are unlimited.

The additional rebates for purchasing participating products are available simply by enrolling in the Upromise program — even if you don't have the credit card itself. You can also enroll in the program even if you don't have a 529 plan open yet, says Jim Fadule, president of Upromise Investments. Upromise will simply accumulate your money and will send you a check on request. Automatic deposits into an existing 529 Savings plan are available only if you invest in one of the three state plans co-managed by Upromise (Nevada, Iowa and New York).

Two alternatives are offered by credit card issuer MBNA. The Fidelity Investments 529 College Rewards credit card offers a flat 2% rebate on all purchases, capped at $1,500 per year. To qualify for the card, you must have an existing 529 savings plan with Fidelity. The MBNA BabyMint card has no annual limit, and offers 1% cash back on all purchases and additional rebates with certain retailers such as Eddie Bauer (4%) and Best Buy (1.5%). The advantage of the BabyMint program is that you can link your credit card to any existing 529 savings plan or Coverdell Education Savings Account. Also, should your child wind up going to one of 160 participating colleges, you'll earn an additional "match" based on your accumulated rebates. If, for example, you earned $2,000 through the program and your child then decided to attend DePaul University in Chicago (a participating school), BabyMint would contribute an additional $2,000 towards your tuition bill. For a list of participating schools, click here.

Keep in mind that all contributions through these rebate programs will count toward your annual limits on contributions to 529 Savings plans ($11,000 a year for gift-tax purposes) or Coverdell ESAs ($2,000 a year or less depending on AGI). For more on that, click here.

3. Increase Your Nest Egg
For those who find they never have a dollar left at the end of the month to set aside for their golden years, these three credit cards will come in handy.

MBNA's Fidelity Investments card offers the most generous reward: a 1.5% rebate on any purchase, up to $1,500 a year, deposited directly into any taxable or tax-deferred Fidelity account.

For investors who have an account with ShareBuilder (an online brokerage that allows investors to purchase fractional shares, making it possible to invest minimal amounts at one time), BankOne's ShareBuilder card offers a flat 1% rebate on all purchases, up to $600 a year. (ShareBuilder offers individual or joint taxable accounts, IRAs and Coverdell Education Savings Accounts.)

And MBNA's NestEggz.com card works similarly to the BabyMint or Upromise programs — only the rewards are directed toward a retirement savings account. By using the credit card, you will get a 1% rebate on all purchases, plus additional rebates from certain retailers. There's no annual cap on rebate dollars. Starting in June, NestEggz.com will also offer a 3% gas rebate, regardless of where the gas is purchased. (NestEggz.com and BabyMint are owned and managed by the same company, Atlanta-based Vesdia Corp.)

With any of these programs, should you choose to direct your savings toward a tax-deferred account, remember that your rebate contributions will count against your annual limits, as determined by the IRS. (For more on eligibility and contribution limits for IRAs, click here.) But the good news is, should you choose to contribute to a tax-deductible IRA, you will still be able to deduct your contribution from your taxable income.