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If you spend any time at all in a discount shopper online forum, like Reddit’s Frugal forum, it won’t be long until you run across a credit card cash back rewards cheerleader. They’re the people who boast about getting a $500 to $1,500 check from the credit card company every year, or brag about the fabulous trips they take with mileage points.
It’s human nature to be tempted by anything that seems free — and there’s nothing more appealing than than free money. The truth is credit card rewards are to your personal finances what bait is to fishing, a means to get people hooked on using plastic. Financial responsibility guru Dave Ramsey says when you use credit cards you don’t “feel” the money leaving your hand. On average people will spend 47% more when using credit cards than they do paying cash.
Casino Math
Casinos understand human nature quite well, and that’s why most casinos offer gambling customers “free” drinks, meals, and hotel rooms. Those freebies, called “comps,” keep gamblers at the tables and slot machines where, after a while, those free drinks start becoming very expensive. They’re also counting on customers practicing “casino math” to brag about winning a $100. What gamblers overlook is the amount of money they put in to winning that $100. If they spent $40 in a slot machine to win $100, they’re only up $60, not $100. If a patron keeps gambling after winning that $100, that loss also comes off the “winning” total. Credit card companies also operate on casino math, knowing few people will actually look very hard at the real numbers.
Banks Play the Odds
Banks and credit card companies offer rewards and cash back for the same reason casinos offer free food; it keeps people who think they can beat the system coming back. The sad reality is credit card rewards are more like commuting to work through a minefield every day. The credit card companies know that a certain percentage of people will stumble on the path of financial responsibility, and end up carrying a balance or miss a payment. When consumers do miss a payment or carry a balance, all those “rewards” disappear in a blast of late fees and added interest. According to Gallup, credit card rewards programs are a mistake for nearly 60% of consumers.
Know thy Enemy
It’s really amazing the number of people who think they can beat casinos and credit card companies; they’re multi-billion dollar industries with the best information on human behavior money can buy. You’re also playing the bank’s game, with their rules on their turf; anyone who thinks they can go one-on-one with a giant corporation and win has delusions of grandeur. The “winners” bragging in consumer forums either beat the odds, or they’re being paid to post; either way it’s a bad deal for you.
Analyzing the True Cost
Next time someone brags about the “free” trip they got with their reward miles, ask them a few clarifying questions. Did the cost of the ticket include baggage fees and airport taxes? Were the hotel, meals and entertainment included in the cost of the trip? What about the cost of the rental car? When you carefully analyze the cost of travel, it turns out airfare is one of the marginal expenses. According to Priceline.com, the average domestic airfare in 2013 was $375. Counting the cost of a rental car, let’s say $45 a day with taxes, that leaves $335 for hotel, entertainment, and meals. You can have a big time on that kind of money in a place like North Platte, Nebraska, but anywhere else $335 isn’t going that far. That means you’re skimping on the hotel and meals, or foregoing much in the way of entertainment. If you want to stay at nice places, eat at nice restaurants, and have some money left over for entertainment, you’re going to need a bigger budget. If you add up all the ancillary costs of travel, most of the time you’ll discover that the airfare to get there was not a major component of the cost of a vacation.
It’s possible to fly, stay at hotels, and buy gas all without using credit cards; millions of people do it everyday. It’s necessary to keep a closer eye on your accounts and carry enough of a balance in case a gas station or hotel adds a “monetary block”, a temporary $50 to $100 hold on funds, to your bill. We’ve traveled all over the country and never had problem buying airline tickets, staying anywhere or gotten stuck with a disputed bill because we used a debit card instead of a credit card. There’s a lot of peace of mind not walking through that financial minefield every month and being fiscally responsible is its own reward.
-Redtea
Independent News for the Right-Minded American
It’s human nature to be tempted by anything that seems free — and there’s nothing more appealing than than free money. The truth is credit card rewards are to your personal finances what bait is to fishing, a means to get people hooked on using plastic. Financial responsibility guru Dave Ramsey says when you use credit cards you don’t “feel” the money leaving your hand. On average people will spend 47% more when using credit cards than they do paying cash.
Casino Math
Casinos understand human nature quite well, and that’s why most casinos offer gambling customers “free” drinks, meals, and hotel rooms. Those freebies, called “comps,” keep gamblers at the tables and slot machines where, after a while, those free drinks start becoming very expensive. They’re also counting on customers practicing “casino math” to brag about winning a $100. What gamblers overlook is the amount of money they put in to winning that $100. If they spent $40 in a slot machine to win $100, they’re only up $60, not $100. If a patron keeps gambling after winning that $100, that loss also comes off the “winning” total. Credit card companies also operate on casino math, knowing few people will actually look very hard at the real numbers.
Banks Play the Odds
Banks and credit card companies offer rewards and cash back for the same reason casinos offer free food; it keeps people who think they can beat the system coming back. The sad reality is credit card rewards are more like commuting to work through a minefield every day. The credit card companies know that a certain percentage of people will stumble on the path of financial responsibility, and end up carrying a balance or miss a payment. When consumers do miss a payment or carry a balance, all those “rewards” disappear in a blast of late fees and added interest. According to Gallup, credit card rewards programs are a mistake for nearly 60% of consumers.
Know thy Enemy
It’s really amazing the number of people who think they can beat casinos and credit card companies; they’re multi-billion dollar industries with the best information on human behavior money can buy. You’re also playing the bank’s game, with their rules on their turf; anyone who thinks they can go one-on-one with a giant corporation and win has delusions of grandeur. The “winners” bragging in consumer forums either beat the odds, or they’re being paid to post; either way it’s a bad deal for you.
Analyzing the True Cost
Next time someone brags about the “free” trip they got with their reward miles, ask them a few clarifying questions. Did the cost of the ticket include baggage fees and airport taxes? Were the hotel, meals and entertainment included in the cost of the trip? What about the cost of the rental car? When you carefully analyze the cost of travel, it turns out airfare is one of the marginal expenses. According to Priceline.com, the average domestic airfare in 2013 was $375. Counting the cost of a rental car, let’s say $45 a day with taxes, that leaves $335 for hotel, entertainment, and meals. You can have a big time on that kind of money in a place like North Platte, Nebraska, but anywhere else $335 isn’t going that far. That means you’re skimping on the hotel and meals, or foregoing much in the way of entertainment. If you want to stay at nice places, eat at nice restaurants, and have some money left over for entertainment, you’re going to need a bigger budget. If you add up all the ancillary costs of travel, most of the time you’ll discover that the airfare to get there was not a major component of the cost of a vacation.
It’s possible to fly, stay at hotels, and buy gas all without using credit cards; millions of people do it everyday. It’s necessary to keep a closer eye on your accounts and carry enough of a balance in case a gas station or hotel adds a “monetary block”, a temporary $50 to $100 hold on funds, to your bill. We’ve traveled all over the country and never had problem buying airline tickets, staying anywhere or gotten stuck with a disputed bill because we used a debit card instead of a credit card. There’s a lot of peace of mind not walking through that financial minefield every month and being fiscally responsible is its own reward.
-Redtea
Independent News for the Right-Minded American
I use them to chip away at my mortgage. The key is to not buy things you would not buy anyway. For example, most utility and insurance companies accept credit cards as payment with no additional surcharge. I'm going to pay my water bill and car insurance regardless, may as well earn some rewards while I am at it.
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