I use my credit card for EVERYTHING, which allows me massive cash back rewards and I don’t pay a single CENT in interest. Just as you mentioned… this means I’m getting paid to be wise with my finances!

Basically, the result is I never have any debt because I view it with a debit card mentality, and I never pay for travel (air + hotel) because I use points.

Love AMEX.

Great catch and great analysis. I was about to respond to the first comment but you addressed everything and more of what I wanted to say

I still challenge the article’s notion that because you pay off the card it’s not debt. It is since you haven’t paid the card issuer (the lender) yet. And truthfully, you are advancing next month’s paycheck for this month’s expenses using a credit card (say you spend 3000 this November on the card and 2000 in cash: the 3000 is not billed until December, and you pay it out of your December pay check). In business school, this is considered good money management, but it’s still debt and would show as a liability until paid. Same is true in personal finance, and the debt even shows on your credit report.

While you are right that there is no net difference in your example of job loss, what you have to factor is net effect of having debt. You’ve actually increased the risk of default on that debt when you lose your job (which was my point, not the net cash flow). If you’re living on savings and unemployment insurance, you’re more likely to not pay the full balance of the card to “make it through” until you have a new job. You sound responsible and could handle it, but you’re still accepting more risk by having the debt on the card. Since you are paying October’s expenses in November, when you lose your job on Nov. 1, you still have to pay October’s expenses that were charged. If you had paid cash, those bills would have been paid and you could immediately trim down your expenses to match the unemployment income.

And whether you think you are actually spending the same you would otherwise, it’s the incidentals that get you. I wish I could quote and reference the studies I’ve heard, but basically the reason McDonald’s started the drive for fast food places to accept cards was because they found people spent 50% more when using a card versus cash (this wasn’t based on rewards cards, just cash versus card, including check cards). That was more than worth the cost of accepting cards and the extra time processing it at time of sale. Most people instinctively hang onto cash versus using a card where you can’t feel it slipping away. I’d challenge you to go cash only one or two months and see the difference. My wife and I have seen the difference.

On the retailer topic, I introduced this because you may have implied in the article that you were “gaming the system” since you paid it off every month: making it in essence free money. (forgive me for bringing it up if it wasn’t the implication) However, the bank basically doesn’t lose any money because the retailers are forced to pay it.

Yes, retailers pay different rates on different credit cards. I was pecking this out on my Blackberry, so couldn’t elaborate, but check cards are the cheapest. Then low cost, no reward credit cards are slightly more expensive, and then rewards cards by Visa/MasterCard are next, then Discover and American Express are the highest.

I handle the bookkeeping for my wife’s retail shop. She is charged about 10 different rates for different types of Visa/MasterCard products. Discover has a single rate, and American Express has several tiers as well.

The retailer has no choice in accepting the card tiers. You either accept all tiers or you don’t accept one particular brand’s entire line up. Don’t feel bad for them, because the comment was right that the retailer benefits from accepting the cards. The point is that the banks aren’t losing any money. They’re sending it back to the retailers to pay for. We just have no choice about the separate rewards program cards’ extra cost.

Ultimately, that means you pay for your rewards. You aren’t getting as great a deal. The retailer wraps the credit charges back into the prices for the goods and services. As mentioned, you do benefit from the rewards card versus cash because the retailer’s product is exactly the same price either way, but know that cash customers are also subsidizing rewards card programs. In our area, a chain gas station has started offering lower prices to cash customers…as much as ten cents less a gallon since they save that much on credit card fees.

Ultimately, I’d bet you do spend more at each retailer than you would using cash…you just don’t realize it, and I think THAT is the point to be made.

Spending is higher because people purposefully put more on the rewards cards to take advantage of the reward.

Rainer is right that merchants pay fees for credit card transactions. But the retailers choose to accept the cards and I’m not forcing them. Retailers also save money with credit cards by increasing their sales, reducing employee theft of cash, reducing loss through bounced checks and reducing errors from non-electronic transactions. They have to decide if the card transaction fee is worth it to them and they almost all seem to think it is.