The credit card point system. The darling of the credit card industry.
If you talk to the average US consumer, they’re seemingly obsessed with the various rewards they think they’ll earn using the right credit card. They believe taking on credit card debt will allow them to live a higher quality lifestyle using the free airline miles, cash back or even hotel rooms they earn with the credit card point system.
“It was money I was going to spend anyway!” is their rallying cry.
However, study after study has proven we spend a minimum of 20% more than we normally would when we use a credit card instead of another form of payment. So, does living your life in pursuit of credit card rewards make financial sense?
Let’s run some numbers together, and take a closer look.
I Get Cash Back!
The average cash back amount for a credit card in the US in 2017 is 1%. Yes, that’s it. One percent. That means for every $100 you spend, you’ll earn exactly one dollar. According to Time Magazine, in 2016 a typical household in the US carried an average of $16,061 in credit card debt. Running the numbers again, that means that same household only earned $160.61 in cash back. No, that’s not a typo.
But wait, add in the interest rate that averages 16.24% in the US, and suddenly you’ve just paid another $2,608.30 to earn $160.61. (Here’s how compound interest works against you.)
That free money doesn’t seem so free now, does it?
I Get Airline Miles!
We’ve all seen the advertisements encouraging us to sign up for the latest card that promises large amounts of miles just for opening up the account.
Experts call this “chasing rewards.” You make purchases or open credit cards you wouldn’t normally just to get the points. Most people who end up with high amounts of credit card debt attribute their problem to chasing rewards.
Have you ever tried to book a flight using your miles? Airline miles are notoriously difficult to redeem. Most airlines have blackout dates preventing you from traveling when you want and still charge you fees to redeem your “free” miles. Airline rewards cards usually have higher interest rates than other credit cards in addition to an annual fee.
Still…. the whole concept sounds tempting. So what does the process look like in real life?
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Let’s look at what it would take for me to fly from Denver, CO to my hometown of San Diego, CA. I know I can get an airline ticket in economy for between $200-$300. For that same ticket, I would need to use approximately 12,000 airline miles. Using that same airline’s credit card, I would only earn 1 point for every one dollar I spent. Which means my $200 airline ticket would actually cost me $12,000, not including the interest and annual fee!
For $12,000, I could fly from Denver to Sydney in Business Class.
Pardon me while I go find my passport.
I Pay Off My Balance Every Month!
Chances are, you don’t. Less than 35% of credit card holders in the US pay off their balance each month. Most leave a small balance that carries over. This results in a small, steady increase in debt over time.
Even if you’re a part of that small percentage, you may be living in a dream world.
We’ve talked MindShift.money members who claim to pay off their balance every month. But when taking a closer look at their actual spending, we discover their credit card is hiding the truth of their financial situation.
Yes, they pay that balance off every month. But it turns out they’re actually living a month or more behind on their expenses. If they didn’t have the float their credit card provides, they would be broke.
The question to ask yourself is if your credit card was cancelled tomorrow, would you be able to pay your expenses this month out of your regular bank account?
If the answer is no, take a hard look at how you’re spending your money. And start working toward eliminating credit card use altogether.
It’s A Trap!
To be truly successful, study and emulate the habits of successful people. Achieving Financial Freedom means living–and taking advice from the 4%–not the 96%.
There’s a reason the 4% don’t use credit cards to finance their lifestyle. They didn’t get rich getting cash back. They don’t take first-class vacations using their airline miles. And they certainly would never dream of justifying excessive spending just to get more points to redeem.
As a MindShift.money certified coach, I want to encourage you to avoid the trap of the 96%. Choose to live like the 4%, and say no to the credit card point scam.
Community Question: What’s the worst reason you’ve heard to justify using a credit card for points? Tell us your story in the Financial Foundations Community!
The views and opinions expressed are those of the guest author and do not necessarily reflect the views and opinions of MindShift.money.
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Wendy Priester is a former Tax Auditor turned freelance writer and certified Financially Fit Bootcamp Coach. When not working with clients to help them live their best financial life, Wendy can be found exploring the Rocky Mountains of Colorado with her two hyperactive dachshunds.