I was prompted to write this article by my dear old young, mom, I’ll call her Mama Ninja. She thought it would be valuable to explain the benefits and risks associated credit card incentives. I have blogged about credit cards a few times before, here, and here. But never really hit on the point Mama Ninja raised: “Is using a credit card with incentives a good idea?”
For those that don’t know much about credit cards, certain banks offer incentives with their cards to customers who purchase from merchants who accept credit card payments online, ultimately hoping it brings in more business for them. Some of the most typical offers are: 1%-3% cash back on all purchases or one frequent flier mile administered for each dollar spent. If you’re still a little confused…you’re dumb….just kidding (kind of). Basically, if you charge $10K to your card over the course of one year and you have a credit card that offers 1% rebates on all purchases, the credit card company will credit your account with $100 by the end of the year. If you have a credit card and it doesn’t have incentives you might want to consider tracking a good offer down and signing up, after all, it is free money.
So why would the credit card companies want to give money back to you? The answer is simple. Most people with a credit card carry a balance from month to month and that makes the banks filthy stinkin’ rich. *Side Note: If you have credit card debt, pay that ‘ish off ASAP, sell a kidney if you have to, because the interest rate on credit cards is ridiculous.* They offer incentives to entice new customers, with the hope that they will not pay off their balance each month. Think about it like this, if you carry a balance on your credit card, they win. If you pay your balance in full each month you win.
So why did I recommend you sign up for using an incentives card? I would only make that recommendation if you have a proven track record (6 months or greater) of paying off your full balances EVERY SINGLE MONTH or if you posses crazy amounts of discipline. If you can’t do that, don’t sign up for any more credit cards!
I personally have a card that rewards me one frequent flier mile for each dollar I spend. I have had the card for two years and have always paid the full balance before the end of the billing cycle. I pay $75 each year to Bank of America to hold their Alaska Airlines Credit Card. I would almost always recommend that you only use credit card incentives if there are no strings attached…like an annual fee.
Why do I deviate from my own advice? Although I pay $75 each year for the card, I not only receive the miles on each purchase I make, but I also receive one $50 companion ticket each year. The companion ticket just means if someone I know flies Alaska Airlines to any destination I can get a ticket with them for just $50. I used it a couple months ago when I flew to Seattle with a friend and paid $50 for the ticket, when it would have cost me $225 if I purchased the ticket solo. So for me, the cost of being a member $75 is worth it to get a $50 dollar flight. I basically paid a total of $125 for my plane ticket ($75 annual fee plus $50 ticket fee). I could get a variety of different credit cards that offered similar mileage plans, but none can compete with the companion ticket offered through Alaska. The incentives offered with my credit card are perfect for my situation. If your preferences differ, consider going with a cash back card, but at the end of the day, never forget…Credit card companies wouldn’t offer these incentives if they thought you were going to pay your balance on time.
If you do chose to sign up for an incentives card it is imperative you pay the full balance every month, on time. Now that I have bestowed wisdom upon you (actually you probably knew all of this) go forth and do great things.
…and in case you are wondering, I drew the plane up top…pretty good right?
You have done well Debt Ninja! And yes I paid off my card prior to the billing cycle.
Other things to consider are that when using plastic, you are more likely to spend up to 12%-18% more. The reason is that sliding plastic doesn’t register as pain like handing over some Benjamins would. Also more than 70% of all Airline miles are never redeemed.
Credit Card companies NEVER lose which is why they spend so much fishing people in. I think it’s great that you pay your balance off every month but if you do then why not just use a debit card instead of taking the risk with a credit card. If you plan to pay your bill each month but are hospitalized or lose your job or any number of possibilities, then you have a debt that is going to be a burden to you. Why take the risk?
Enemy of Debt– Thanks for stopping by and putting in your two cents. I guess I’m a little confused by your advice (which mirrors dave ramseys) you said don’t use credit because you are more likely to spend more, but then in your next paragraph you told me to use my debit card instead of my credit card. Both are plastic and have the same psychological impact on me, because I treat my credit card like a debit card by using it, there literally is no difference between the two when you pay the balance in full each month.
I also disagree that credit card companies NEVER lose. The only money they have made off of me is the $75 annual fee, which I hopefully clarified well enough why I am okay paying it.
I totally agree with all of your points for the average joe, but with proper discipline it is pretty hard to argue that a credit card with incentives is a bad thing. Thanks again for throwing out your opinions. It’s always good to have a constructive debate.
Debt Ninja – Thanks for welcoming me and I should have been more clear but I was trying to keep it short. I do not use credit cards anymore but I do use my debit card for paying bills and utilities or money transfers between accounts. I try very hard to use the envelope system when buying stuff like groceries and fuel or even clothing.
Spending cash causes a little more frugality when buying anything. You tend to question your true need for anything you are thinking of purchasing. I am certainly not saying that someone disciplined enough to pay off their balance each month is in great danger but there are still risks like the ones I stated above.
My question was only intended to find out why you would take on risk for the small benefit you might receive. You have to admit that there is a possibility that when you are spending with those rewards cards you can spend even more simply because of the fact you feel you are getting something for free. (Which is what they want you to feel. They didn’t create that program just to continue giving credit, people already are standing in line to do that daily…they were also looking for an increase in sales on each purchase as well.)
With what you might have saved by using cash or a debit card from your checking account, (without a little incentive in the back of your head telling you to get those rewards), you could have also funded most of your airline ticket? What are the net rewards and what is the risk in order to get those rewards?
“Both are plastic and have the same psychological impact on me, because I treat my credit card like a debit card by using it, there literally is no difference between the two when you pay the balance in full each month.”
The difference is your annual fee
plus the spending incentive causing you to add a couple more dollars to your purchases. (Again I am not saying YOU do, I am just saying A LOT more activity happens in the brain when you are spending cash.) Credit card companies use statistics and research to formulate their next GOLD Card, Rewards Card so that they can maximize their return on investment. You are their investment vehicle and when/if you mess up or quite simply life happens, they benefit.
I am certainly glad you are not the average Joe, I could tell that from reading your blog. You have discipline but just remember life can bypass discipline at any moment and when that happens survival decisions are made and discipline slowly starts to disappear. For people with debt or the ability to use debt that becomes a nightmare waiting to happen which is even worse without a good savings account.
I just wanted to say that I wish I would have had it as together as you when I was your age. I admire your position and attitude. Most of the people I know that are your age are not thinking about Roth IRA’s and finance in general. I found your site over at Budgets are sexy, and have enjoyed reading your stuff. Please forgive the length of this reply, I just LOVE talking about this stuff. PEACE!
I totally agree with all of your points for the average Joe, but with proper discipline it is pretty hard to argue that a credit card with incentives is a bad thing. Thanks again for throwing out your opinions. It’s always good to have a constructive debate.
Sorry about the last paragraph, I forgot to delete it before publishing my blog, I mean my comment. lol
Mr Debt Enemy- Dude, you win a bloggers award for longest comment ever! Haha. Great response. I’m not gonna lie and say Im 100% sold on your arguments, but your thoughtful rebuttal definitely had some great points.
I personally have found that I operate the other way around. If I have cash in my wallet I spend it. It’s that simple. I don’t have the discipline to keep a couple bucks in my wallet, cause I will always end up stopping by 7-11 and gettin a big gulp. I totally see the benefits of the envelope system. But I really like being able to use quicken to track my expenses (which I use to make sure I am staying in line with my budget). If I was using cash purchases for all my $5 charges that would be a ton of receipts I would have to keep to see exactly where and how much I spent on certain days. I guess you would argue that I could have the same benefit of tracking in quicken if I used a debit card, but then that again brings up the point of “plastic is plastic”.
Overall, I guess I can’t really argue with you because your beliefs are obviously going to work. Your way eliminates the possibility of racking up debt. I made a comitmment to myself that I would rid myself of credit cards the day they bit me in the a$$, like a late payment or penalty fee.
I also know that having a good credit score is important to my future goal of purchasing a home. I know that the only way to have a good credit score (or as Dave calls it the I Love Debt Score) is to continue borrowing money and then paying it back in full. You and I both know that when one goes to take out a mortgage credit score is a HUGE factor for the interest rate you will receive. It hasn’t always been this way, but unfortunately, especially during this economy, a good credit score can save BIG money. The disciplined use of my credit card will help raise my credit score and ultimately save me thousands of dollars on a mortgage.
p.s. I love finance too, and I think I love have intelligent debates about it as well. We both have the same objective, just slightly different ways to get there!
Yeah, sorry about the long post. Once I get going it’s nearly impossible to stop. haha!
Like I said man, you have a great head on your shoulders and as long as you stick to your commitment to slay the dragon once it finally bites you, you will be fine.
I totally understand the concept of spending cash if you have it. This is why we only grab the envelope we are going to use for the day. (When you know you have $200 for groceries you are less likely to spend it on other things.)
I used to be especially bad once I broke a $20, then it just disappeared before my very eyes. You also seem to know a lot about Dave Ramsey’s plan which is great. I guess you know what he says about being able to get a mortgage without using a credit score so I will leave that one alone.
Anyone that enjoys punching debt in the face is a friend of mine!! 🙂 Keep up the great work dude!
I like incentive credit cards. I use my credit card for as many purchases as possible because I can easily track all of my purchases electronically. This really facilitates keeping to my budget. I also use credit cards to pay as many bills as possible. This makes all those incentive points basically free money.
To be fair, if I was living paycheck to paycheck using my credit card to pay non-utility bills would have to stop. Behavioral studies show that people who use credit cards spend something like 12% more than they would if they use cash.
I would conclude by saying that if you don’t pay your credit card off in full each month, no amount of incentive points are worth it. They’ll never amount to the money that you are dropping in interest.
Comments are closed.