Rent payment by credit cards (Cred & Nobroker): To take it or leave it

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Most of us who use credit cards are being bombarded with multiple offers and discounts. Most of these products or offers are irrelevant to us and we tend to ignore them. However the option to pay rent is probably the most relevant product for most of us. This option is now available with multiple platforms like Cred, Nobroker and Red Giraffe etc. So let us try to understand whether its worthwhile to use this option.

What is the product

The above mentioned websites offer the option to pay rent through credit card. While Nobroker and Cred charge in the range of 1%-1.5%, Red Giraffe seems to have the lowest fees (around 0.4%+GST) but their tie up is with limited banks.

The way Red Giraffe markets the product on its website it seems to suggest that it’s a customer acquisition product for some credit card companies.

Who can use this product

Anyone who pays rent through online methods can use this facility. Some landlords who do not disclose their rental income in tax returns may not want to receive money through this channel.

While Red Giraffe has made it mandatory to add rental agreements to their portal, other sites have not yet made it compulsory. So you can simply add the bank details of your landlord and pay the rent through these websites. While there is a chance that this product can be misused its best not to do so as it will reflect on the account statement of the payer and receiver. Such transaction may also attract tax scrutiny so its best to use it for the right purpose. These payments can also be used for showing the rent records for taxation purpose.

So let us try to see the financial aspects of using the option.

Advantages

1) Extra liquidity and earnings of interest: If the rent is paid through credit cards the rental amount can be parked in savings account to earn extra interest. Assuming 5% interest on savings account deferment of rent by 45 days can earn interest of approximately 0.6% (5%*45/365) per transaction.

This savings is the least valued of all the savings and should be ignored in the calculations. We will discuss this point later.

2) Credit card reward points: Every card has different method of calculating reward points. Most of the cards will treat it as utility bill and pay low reward points of 0.5% to 1%. Some good cards like HDFC Infinia and Diners black pay 3.3% reward points on every purchase. So the reward calculation of each card should be clearly understood before choosing the option

No broker claims that one can earn 30,000 by paying 4.5 lacs in rent every year when they pay through premium SBI cards and some American express card. So clearly some cards can give disproportionate benefit by using this facility.

3) Spending Target achieved: Some cards like American Express Platinum travel card reward its members if they achieve a certain spending threshold. Adding rental payments through such cards will definitely help one achieve those goals. Since the rewards received after achieving those milestones are very lucrative, paying rent through these high end cards is definitely very lucrative.

For example I own an American express card which rewards me for spending 4 lacs per year by giving flight vouchers worth 11,800 and Taj voucher worth 10,000. So clearly I have nice incentive to pay through my Amex card. Meanwhile my citicard does not reward me for any such spending milestone and will reward me less than 1% as they will classify this as utility payment. So I would use it for my American express card and not for my Citibank card.

Some cards have a certain threshold beyond which the annual membership is waived off. So if adding rental to credit card payment will help one achieve those benefits then it should be definitely considered.

4) Site reward points: Some sites like Cred have their own reward points which can be used for some discounts or cashbacks. While its hard to quantify the monetary value of those rewards points, one needs to explore the sites to understand the benefits of the site rewards points.

So we can clearly see that this option is much more rewarding for higher end cards. So sites like Nobroker and Cred have a clear advantage due to their tie up with high end cards like American express and Diners club. Red Giraffe has recently tied up with HSBC to give cashback upto 5,000 along with low processing fees.

So if you have a higher end card you should probably go with sites like Cred and Nobroker while if you have a regular card then you should use Red Giraffe.

Disadvantages

1) Overspending: Like any other usage of credit cards its hard to point out any disadvantage of using credit card. If one uses credit card wisely then it’s a great tool to earn rewards and points while paying no extra charge. But this is possible only in theoretical scenarios.

Credit cards earn their maximum profits through interest and other finance charges. They want customers to spend more every month from the card so that the outstanding amount can be rolled over and interest be earned. So if one has low financial control over one self then they should avoid credit cards. If you don’t pay your full outstanding without fail then adding rental payments will be a financial nightmare for you.

Adding this cost will add great problems to the financial situation of most of the people. So if one is absolutely sure of repaying the rental amount along with other dues on time and in full only then they should consider this option

2) Interest may not be earned: While theoretically it may be nice to point out the interest earned from putting the money in savings account its quiet possible to use the rental money for some other expense.

While the disadvantages are real and one slip up can cost you lot of money there is a simple way to avoid it. If you are using card payment to pay rent then pay the full amount to credit cards on the same day. You will only loose the savings interest of 0.5%-0.6% which means 200-240 rupees on a payment of 40,000. This number should not be a game changer for you to take decision. This will ensure that

a) You don’t spend the rental amount elsewhere and fall short when the card payment is due

b) Your credit history looks great and will enhance your credit score

c) You will lose a very small amount but ensure that no late fees or interest fee is charged to you. Even if you miss the rent repayment once for 5 days, the potential gain of 1 year from savings interest will be wiped off

So if you want to use the facility and be safe then its best to pay the rent within 1–2 days of getting the confirmation receipt. If you don’t have the money to follow this then you should not opt for this mode of payment.

Conclusion:

Since credit card companies pay cashbacks and other rewards to promote this facility it is clear that they like this product and expect to earn from it in long term. Before deciding which site and card to use one should calculate the advantage for each scenario to calculate the expected gains. The gains are expected to be much higher for high end cards like Amex and Diners club.

· Its hard to point any obvious disadvantage of using this facility as the financial advantages for most of the credit cards will theoretically beat the cost involved in this transaction.

· Ignore your earnings from savings account and pay the rent amount in full in 1–2 days

· If your annual earning from rent payment is substantial (more than 4%) of your rental bill only then this facility should be used

· So people with high rewarding cards along with financial awareness and great self-control should definitely use this option.

· However if one is not sure about his financial planning and overspending tendencies then one should avoid this facility as this can push them towards debt trap