There was an interesting article going around the Personal Finance circles yesterday about this ABCNews segment entitled “The Truth About Credit Card Reward Programs” and it concluded that people that utilize credit card rewards programs are irresponsible with their cards via the following statement verbatim (I bolded):
“First, studies have shown that credit card users with reward programs spend twice as much as credit users without reward programs. This leads to increasing your debt level.”
This is completely misleading and sloppy reporting in my opinion. How does one conclude that by putting a greater portion of your spending on a credit card, you’re increasing your debt level? What is true is that if you spend more than you make and you put ANY of your spending on a credit card, you are increasing your debt load on credit. But if you spend less than you make but happen to rely on a credit card as your primary means of payment, you are not incurring debt, but rather you’re a saver, right? Also, when you say “studies have shown”, what legitimacy does that lend? What studies are they referring to? Who conducted them and what were the authors’ conclusions? Not only does the statement lack substance, but remember the tried and true statistical mantra:
Correlation is not Causation
Consider our family’s situation. We’ve been very disciplined for years and 1 person handles all the finances (me) so I have complete visibility of all inflows and outflows. I’ve never paid an interest payment on a credit card save for one month when I was in college and messed up – and I’ve never forgotten it, even though it was like 27 bucks. I hate the idea of paying an above market rate of interest on anything. Paying 4.625% on a mortgage? Fine. Paying 30% to a predatory lender? No way. But since that date, we’ve always executed the discipline required to do the following: Charge virtually everything and optimize cash back rewards each month. This discipline and opportunistic role-reversal on the credit card companies derives upwards of $500 per year in tax-free income for doing nothing except abiding by good money habits. If I eat lunch at work, I charge it. If we make a large purchase, I charge it. I charge gas. While many tried and true anti-credit card advocates will certainly cringe, this is how we live and it works for us. We’re getting paid to exercise discipline.
Now, back to the premise. Because we charge a high portion of a decent annual income, we are probably charging much more than the typical American. However, the typical American carries several thousand dollars in credit card debt. I don’t believe this is an anecdote, but rather, many Americans employ the same tactic we do.While some think they’re getting these great rewards at 1-3% and then they’re paying 20%+ on a credit card are being foolish, many others are never paying a dime in interest, but they are charging a fair amount – and contrary to the article’s statement – They Are NOT Increasing Their Debt Load.
Let’s take two consumers:
- Post-tax monthly income of $2500 and a credit card user.
- NON-rewards card.
- They carry debt and hence opted for a lower interest rate card that didn’t provide rewards.
- Post-tax monthly income of $5500 and a credit card user.
- Rewards card holder.
- They don’t carry debt and utilize the card heavily to maximize rewards.
Consumer #1 takes home $2500 per month, but spends a total of $3000 per month. Even though they use the card sparingly, they’re still tacking on at least $500 in additional credit card debt each month to make up for the cash they don’t have coming in the form of the paycheck. They live month to month which draws a hefty toll long term.
Consumer #2 takes home $5500 per month and spends a total of $5000 per month. They are a net saver, not spender. However, since they seek to optimize credit card utilization, they’re charging $3000 per month and paying it off the next month.
Tell me which consumer you’d rather be? While Consumer #2 is a rewards card holder and charges more/spends more overall, they’re living within their means. The inverse is true of Consumer #1.
My overall point here is that the type of card you carry does not define how much credit card debt you incur. In fact, it may be the exact reverse.
Could it be that the type of debt you carry actually drives what type of card you use? Think about it, if you already have high credit card debt, you’re probably going to seek out a 0% balance transfer or low fee card and not worry about rewards at all. You may charge as little as possible because you don’t want to add to your existing debt. However, if you have no credit card debt and don’t really care about interest rates because you have no intention of every paying an interest penalty, you’d go for a rewards card instead of a card with a low rate and no benefits, right?
It is whether you are a net spender or saver during any given timeframe that matters. The fact that reward card holders charge more is surely a multifaceted complex series of contributing factors that does not necessarily translate into an overall greater level of credit card debt per capita (at least based on the actual data provided in the article).
Informal Poll: Do you use a Reward Card or Not? Do you Have Recurring Debt or Not?
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