Ch. 2: Rewards keep growing

Consider a credit card that is linked to an investment account.

Rewards cards tied to investment accounts offered by Fidelity and Charles Schwab offer some of the richest rewards programs around, with no annual fees and no caps on the rewards that you can earn.

They’re out of the park in terms of very aggressive rebate incentives, says Curtis Arnold, founder of CardRatings.com. They’re beating everybody else hands down.

Just how good are the deals? How does a 2 percent reward sound? That’s double the rate of rewards that you’ll find on most other rewards credit cards.

The Fidelity Investment Rewards American Express, Fidelity Retirement Rewards American Express and Fidelity Investments 529 College Rewards American Express cards offer customers a 2 percent rate of rewards on purchases.

The rewards points that you earn can be redeemed for cash deposits into a Fidelity brokerage, a Fidelity IRA or a Fidelity-managed 529 account.

The Schwab Bank Invest First Visa Signature card offers customers a 2 percent rate of cash rewards on purchases. The cash rewards that you earn are automatically deposited into a Schwab One brokerage account each month.

And in a world where credit card issuers are doing everything they can to trim losses and increase revenue, including cutting back on credit lines, upping interest rates and watering down rewards programs, that 2 percent rate of rewards looks all the more impressive.

Two percent is tops, Arnold says. You’re going to be hard-pressed to beat it anywhere.

Investing only

As enticing as these rewards may seem, there is a pretty serious catch. To redeem the rewards, the card must be linked to a brokerage or investment account at Schwab or Fidelity.

So if you’re not interested in doing business with Schwab or Fidelity, these are not the rewards cards for you.

Another key question to ask yourself is how patient you can be about cashing in rewards. To enjoy the full benefits of a rewards card linked to a retirement or college savings plan, you’ll need to be awfully patient. It may be years or even decades before you’ll be withdrawing your contributions, including cash from credit card rewards, from these accounts.

Let’s look at the Fidelity Retirement Rewards American Express card as an example.

A cardholder earns two rewards points for each dollar that they spend on purchases with the card. Once a cardholder earns 5,000 rewards points, equal to $2,500 of spending on the card, a $50 current-year contribution is made to the Fidelity IRA account linked to the card account.

Each $50 contribution generated from credit card spending is subject to all the same IRS rules as all other contributions made to the IRA account, in terms of eligibility, annual and maximum contribution limits and penalties on withdrawals made before the age of 59½.

With a few key exceptions, if you make a withdrawal from an IRA prior to the age of 59½, you will be hit with a 10 percent penalty.