The author suggests that paying for childcare with credit cards can provide significant savings, especially when combined with tax savings opportunities. The Child and Dependent Care Tax Credit can reduce your tax bill by up to $1,200 if you have multiple children, and using a credit card to pay for childcare can earn cash back or help meet minimum spending requirements for credit card bonuses.
The author provides two options for using credit cards to save on childcare costs: using a standard, everyday cash-back card or using credit cards to earn bonuses with a minimum spend. By using one of these methods, you can save thousands of dollars on childcare in a single year.
For starters, the Child and Dependent Care Tax Credit will cut your tax bill, most likely by an amount between $600 and $1,200. That’s because once you reach a salary level of $43,000, you’re limited to a maximum credit of $600 if you have one child or $1,200 for multiple. But still, at $600 you essentially reduce the cost of childcare from $9,589 to $8,989, which isn’t a bad start. An FSA can help too, more on that below.
Credit Card Rewards Provide Relief
But what if you could also pay for childcare with a credit card? At my son’s daycare, this is an option (and preferred by all parties due to its convenience). But even if it isn’t something your facility explicitly offers, you should be able to use Plastiq. There’s a 2.5 percent fee, but the cashback from promotional bonuses will make up for that, as would any other earnings above 2.5 percent. For more info on that specifically, read our post about Plastiq (everything we say about mortgages there is also applicable to childcare).
In the math and examples below, I’ll assume you can pay with a card directly through the facility. Here are two scenarios for how you might leverage that opportunity to save even more money on your childcare.
Use an Everyday Cash-back Card
Option 1: Use a standard, everyday cash-back credit card. Depending on how your child care center is set up, this may be the more practical option for payment. Our daycare doesn’t have an online account that we manage; we just give our credit card info to the school’s administrator, who handles payment each month. Because of this setup, using the same card all year long is the easiest. It would be an awkward and clunky experience to contact the office in order to change the credit card repeatedly. Probably doable, but it would be uncomfortable.
Instead, I can earn an effective three percent cash back using the Discover it® Miles – Unlimited 1.5x Rewards Card, because during the first year, I’ll earn 1.5 percent plus a match from Discover. So using the average costs, I’ll save $287.67 in a year (3 percent of $9,589). With the tax credit, this equals a total savings of $887.67, or 9.25 percent. If they don’t accept Discover, your next best option is a two-percent back card. In that case, you’d save $191.78 by using the card (plus a $600 tax credit).
The baby on the left paid full price. Baby on the right read this post and saved thousands!
Earn Bonuses With Minimum Spend
Option 2: If you’re lucky enough that you can change the credit card you use for child care frequently (without unnecessary hassle), then that expense might be a good contender to help you meet the minimum spend on credit card bonuses. There are a TON of options for cards that can help you do this, but for simplicity, I’ll use the same ones I identified in our post about paying your mortgage with Plastiq.
Those were the Capital One Spark Cash for Business, Capital One Venture Rewards Credit Card, and Barclaycard Arrival Plus® World Elite Mastercard®. One important thing to remember is that the cash value I’m assuming for the Barclaycard and Venture Rewards card is for travel redemption. If you would spend that money on travel anyway, then this is effectively cash back. On the other hand, for the Venture card you can redeem the points at half value for cash back. Just something to keep in mind!
As I mentioned in that other post, my favorite to recommend is probably the Capital One Spark Cash for Business, because its early spend bonus, which is so generous and many people have already maxed out on opportunities with Chase.
It’s an underrated card for sure, and one that can singlehandedly take a HUGE chunk out of your childcare bill. The card has great long-term value as well, so you can’t go wrong with adding this one to your portfolio.
Note: I’ll assume that you use one of the four cards mentioned above each quarter to pay all of your childcare expenses. And rather than listing out all of their specific details, I’ll average all of that together in the math here. Again, read our other post or check out our cards page to see the specific details that I’m not including here. Important note: The figures here were calculated when the Barclaycard Arrival plus bonus was valued at $588. It’s currently valued at $483, so keep that in mind here.
OK–Quarterly, you would spend $2,397.25 on child care (using the average costs), and you would need to spend an additional $1477.75 more to reach the quarterly average minimum requirement of $3,875 on the cards. So your childcare spending would represent 61.8 percent of the total minimum spend. You would earn $1,938 in cashback from those four cards at the end of the year, and technically $1,182.18 of that (61.8 percent) could be attributed directly to the childcare expenses.
But for our purposes, we will consider all of the cashback as savings on childcare, since that was the main goal. In effect then, you would reduce your childcare costs by $2,538 (including the tax credit and cash back), bringing down your childcare costs to $7,051 (a total savings of 26.4 percent!). That’s pretty much like paying in cash but only sending your child for three-quarters of the school year!
What about a Dependent Care FSA?
A dependent care FSA can likely help you earn more savings than the Child and Dependent Care Tax Credit, if your company offers one. Most people are in a position where they need to choose between the FSA or the tax credit (not both). If you have one child and opt to use the maximum dependent care FSA withdrawal, you’ll have $5,000 tax-free dollars to put toward childcare. At the 25 percent tax bracket, that would save $1,250. Add that to the $1938 you can earn with credit card rewards, and you’ll have a total savings of $3,188. Note: If you have two kids receiving care, you might be able to use the $5,000 in FSA funds and the remaining $1,000 in the tax credit.
Paying for childcare with credit cards can provide significant savings, particularly when combined with tax savings opportunities. By using a standard, everyday cash-back card or using credit cards to earn bonuses with a minimum spend, one can save thousands of dollars on childcare costs in a single year. The Child and Dependent Care Tax Credit can reduce your tax bill by up to $1,200, and using a credit card to pay for childcare can earn cash back or help meet minimum spending requirements for credit card bonuses. It is essential to keep in mind that there is a 2.5 percent fee when using Plastiq to pay for childcare. Overall, paying for childcare with credit cards can be an effective way to manage childcare costs and save money.
What is the Child and Dependent Care Tax Credit?
The tax credit can reduce your tax bill by up to $1,200 if you have multiple children.
How can paying for childcare with credit cards save money?
Using credit cards to pay for childcare can earn cash back or help meet minimum spending requirements for credit card bonuses.
What is an FSA and how can it help?
An FSA is a flexible spending account that can also help reduce the cost of childcare.
What are the two options for using credit cards to save on childcare costs?
The two options are using a standard, everyday cash-back card or using credit cards to earn bonuses with a minimum spend.
How much can be saved with a standard, everyday cash-back card?
You can earn an effective 3% cash back, which can save you $287.67 in a year (3% of $9,589).
What credit card is recommended for earning bonuses with minimum spending?
The Capital One Spark Cash for Business is recommended, as it has a generous early spend bonus.
How much can be saved by using credit cards to earn bonuses with minimum spending?
You can earn $1,938 in cash back from four cards at the end of the year.
What is Plastiq and how can it help pay for childcare with a credit card?
Plastiq is a service that allows you to pay bills, including childcare, with a credit card.
What if the childcare facility doesn’t accept your credit card?
Your next best option is a 2% back card, which can still save you money.
How much can be saved with the tax credit and credit card rewards combined?
Using a credit card to pay for childcare can save you thousands of dollars on childcare in a single year, especially when combined with the tax credit.