Rewards programs, especially cash-back credit cards, seem to be all the rage these days especially on personal finance blogs. I think I mentioned on my blog a while back how a fellow employee of mine charges everything to his credit card because he gets 1% cash back for every dollar of purchases. Does he actually think he is getting ahead? People invariably think that they can make themselves richer by using a cashback credit card, than if they did not have a credit card at all. This boggles the mind but it is something that is not surprising. The 1% cash-back, the Air Miles points, the HBC Rewards Club Points are all easy to measure. Determining how much more you spend by using a credit card vs. cash is something that for most people is impossible to quantify.
I just read one common misconception a few days ago: “Hunting for rewards is worthwhile only if the entire credit card balance is paid in full every month.” While technically correct (in my opinion) for a small minority of the population, as the Wealthy Barber says, “many people who pay off their balance each month are still hurt by their use of credit cards.” Just because one pays of his/her credit card bill every month does not mean that the credit is just acting like a convenient replacement for cash. In fact most people spend more using a credit card without even realizing it, even those who pay it off every month. And if you accept this fact, than hunting for rewards programs is not worthwhile. Which brings me to one of the best blog posts I have read in a long time about cash-back credit cards.
Okay, the hottest thing going today, in the financial realm, is the “Cash Back” credit card. Almost every major credit card issuer is offering one of these “wonderful” things, promising you cash back for the purchases you make. Some promise cash back for groceries, gas, or everyday purchases. You can get bonus miles, bonus cash, and bonus gift cards. Wow! These things are wonderful…
Hmmmmmmm…
Get real. These things are CRAP.
I strongly recommend everyone to read this article in full. He lists several counter-arguments to his position:
Now, there are several arguments against my position. I will list a few here, so that you don’t have to:
But ncnblog, I’m responsible with my credit and I pay off my balance each month.
But ncnblog, I was going to buy these things anyway, so I might as well get some cash back.
But ncnblog, I know how to handle my money, and I always make all my payments on time, and I am never going to be late or miss a payment. Relax.
But ncnblog, Credit cards are “safe” and they provide protection for me when I buy a product.
But ncnblog, Etc. Etc. Etc.
and then refutes them all . . .
One more thing, there may actually be one case where rewards programs are useful For people who are absolutely incapable of saving money, rewards programs are a forced savings programs. I am sure some people are incapable of saving up for a flight, for example. To them, earning more Air Miles by spending more money on groceries is not “spending more” than they normally would because this hypothetical person spends all their disposable cash anyways. They can then redeem a flight every 5 years or whatever, a flight that this hypothetical person would have never been capable of saving up for if their life depended on it. Although such a person would probably also have a tough time saving up their Air Miles for a flight anyways . . . So, on second though, rewards programs are in fact never useful.
Of course we all need credit cards at some point, for example, many online purchases require a credit card. So since at least one credit card is needed for these situations (when I use it for these purchases I pay it off instantly), you might as well get a rewards card rather than a plain jane card. On the other hand, the advantage to getting a plain jane credit card is that you never be tempted again to use a credit card for the rewards.
I disagree that most people spend more when using a credit card. Most people spend all their income and some more because they have no idea what they are spending it on. Being spendthrift is not a new phenomenon and predates the credit card era.
I never ever buy anything just because I get 1% back in rewards. I never ever buy something just because I have a credit card. I only buy something when I can pay cash (ok debit card) for it (enough money in the checking account). The argument that you spend more if it is on credit is not true for me. Am I going to buy more diapers or bananas or milk because I am paying with my credit card? Do I pay more for my cable, phone, newspaper or internet because I use a credit card?
Hey, thanks for the link and the love!
As for the comment above, most people who are struggling to get out of debt say the exact same things. (I can control myself, I never spend too much, I use it for the convenience.) Believe me, I said the same things for YEARS. Then, I decided to radically change my financial lifestyle, and that included admitting that I had an addiction to the ease of credit card use. It’s just that simple. For some people (I would argue MOST people) credit cards are TOO convenient. I realize that there are a select few who can use them, EVERY time, in a responsible manner. (I just don’t happen to know these people….even my “wealthy” friends are in debt up to their eyeballs.)
Perhaps the colder climate of Canada has chilled your lizard brain (this is a good thing). It’s human nature to think that one should use their credit card to pay for things because of the cashback. It takes an extremely diciplined person to not fall prey to this, and most people aren’t that diciplined. I recently decided against getting a rewards card because I figured that there was a greater probability that I would spend 1% more on something I didn’t need. It the rewards programs weren’t profitable for the card companies, they would go away.
“Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the New Science of Behavioral Economics” by Gary Belsky and Thomas Gilovich doesn’t address this issue directly, but has a lot of similar material.
CC: It’s funny because a few months ago before we stopped using credit cards for anything but online purchases and the like, I would have said the exact same thing. I was a rabid believer that spending with credit cards, as long as the balance was paid off every month, was no different than cash. And I thought it was actually a good thing, being a month+ of free credit. I always thought of myself as pretty thrifty. When I stopped using a credit card I was shocked at the change it brought on me and my expenses. Suddenly money/cash became so much more valuable to me and things changed. There were a lot of purchases that I simply stopped making because I could not bear to part with the cash. I think that the No Credit Blog might be right when he says:
“when you use credit cards, you are using a form of payment which is not “real”. Whenever you spend real cash, you “feel” the transaction. When you use credit, you don’t “feel” the money leave your pocket.”
I also believe there may be a select few who use credit cards in the same way as cash. I am not implying you are one of them or that you are not one of them. All I know is, I thought of myself as being one of those select few. I had Air Miles and thought that that did not increase my spending either. But now I think differently. I do not think I was one of the select few and I am pretty sure I spent more to get the Air Miles and rationalized the credit card expenses as being “needs” that I was going to buy anyways.
NCN: I can only speak for myself. It is at least five years since I carried any credit card debt. Every single credit card payment has been in full and on time. I have no debt other than a small mortgage and a small loan for a recent purchase of a van. So, I am hardly in the situation of getting out of debt 🙂
Dave: I’ve always use credit or debit for my transactions. I’ve never used only cash, so I can’t comment on your experience. What I can claim is that whether I have to pay credit or debit doesn’t influence my purchasing decision.
Dave: I reread your post about giving up credit cards and I don’t think using debit strictly would cut down my spending impulses. I always have about 2 times monthly expenses in my checking account, enough to cover any small things I might “need”. Your method would only work if I am running out of cash in my checking account and I want something. And I am certainly not going to carry wads of cash in my pocket.
CC said:
“I’ve never used only cash, so I can’t comment on your experience.”
Actually, I did not give the whole story here… I use debit cards mainly (now that I am with PC Financial), not cash. Except for the last month or two with BMO I was using just cash (to save on transaction fees). But when I say “cash” I mean “cash and/or debit cards.”
CC said:
“I don’t think using debit strictly would cut down my spending impulses. I always have about 2 times monthly expenses in my checking account, enough to cover any small things I might “need”. Your method would only work if I am running out of cash in my checking account and I want something.”
Excellent observation here! I hadn’t thought of this. You are right that spending impulses still apply with a debit card and I can agree with you there. I do spend more freely with a debit card compared to cash. But, and I should have mentioned this before, we DO run the risk of running out of cash in our chequing account all the time because we only keep a limited amount in our chequing account every week as opposed to 2 times monthly expenses in your case. We keep just the bare minimum which right now turns out to be about $375/week in our chequing account. Anything else beyond automatic payments and rent goes into one of our ING accounts where we can’t touch it unless we really need something in particular (and so far we have only needed to dip into the ING once for an extra $50 to get through the week). We plan to dip into that ING account for big things that come up.
So there was an extra ingredient necessary for us to reduce our spending. It was not JUST getting rid of the credit cards that did it, it was also limiting the amount of available debit-card-cash, which as you pointed out, is necessary to limit debit-card impulse purchases. I can see how getting rid of a credit card but keeping a debit card and leaving a lot of money in a chequing account to spend, is no different than having a credit card…
I also use my 1% cash back credit card (only one between me and my wife) to make large purchases (yearly vacation etc) and pay it off at the end of the month. Only use it for purchases that we would make anyway. Can’t see the harm in this.
tom: I would use a credit card for large purchases rather than cash/debit-card but I would probably pay it down right away rather than wait until the end of the month. Even then, only if I had to, like airplane flights and other large online purchases. Or things I want protection for. I once had a flight with Jetsgo before they went out of business and I got my money back from AMEX. I would never put a large purchase on my credit card just so I could get 1% cashback or Air Miles. Saving $40 on a $4000 vacation just doesn’t make any sense and it would only encourage me to use the credit card more often.