Myths vs. Truths: The Truth About Credit Card Rewards

26 Oct Myths vs. Truths: The Truth About Credit Card Rewards

Credit Cards Going Down the Drain

Myth: Credit Card Rewards are a smart way to build your credit score and to earn something back while spending.

Truth: You end up spending more money to earn your Credit Car Rewards than the reward is worth.

The first red flag with this myth involves what used to be the most common reward system for your card: airline miles. Did you know that 75% of rewarded airline miles are never redeemed? We Americans can justify some pretty outrageous spending in the name of earning our free plane ticket that we aren’t going to use. And even if you try to use them, so many restrictions apply that it becomes next to impossible to actually redeem the reward. So we switch to other rewards, like cash back and call ourselves smart because of all the money we’re earning back.

But the sad reality here is when we pay with plastic we end up spending 12-18% more than if we had paid with cash. When we attach a stupid logic to the spending like “I’m earning rewards, so why not use the card” we spend a lot more. It’s like the tax return myth. We feel like we need to spend $100 to earn $5. Here’s a novel concept: How about we avoid spending the $100 and keep $100 in our pocket instead of $5 in the pocket and a $100 credit card bill? It’s time we stop stepping over a $20 bill to pick up a nickel.

In my stupid days before I learned to do real math, I had a credit card that earned me 5% back on every purchase. The reward applied toward a new GM car purchase. So my logic was to use the credit card for necessary purchases and earn cash back on a new vehicle. Sounded smart at the time, get cash back on the car so I don’t take the hit on depreciation. It was a good plan that would be applauded by the Smart Money (and similar magazines) subscriber base.

What actually happened was a different story. We started with necessary purchases but quickly began justifying more and more as “necessary” purchases. “Oh, we were going to buy that anyway at some point. Let’s use the credit card so we can take advantage of the rewards.”  The funny thing was we didn’t even realize how bad we got with the rationalizing. We started making major purchases with our credit card whether we had planned to make the purchase or not. But boy, were we racking up the rewards!

Then one day I sat down and did some math. We didn’t have the money to buy another vehicle (gee, maybe because we were spending too much on the credit card) and some of the rewards began expiring. I decided to see how much I had to spend to earn my maximum $3,000 cash back on the new car. At 5% reward rate, I had to spend $60,000 to earn my $3,000 cash back. That’s when it hit me. I was playing a losing game. I was spending $60,000 to save $3,000 on a $30,000 vehicle that would lose $15,000 in value in the first four years. Stupid.

So I decided to do something totally radical. I paid off my vehicles and decided to be content with what I had. I cut up the credit card and stopped spending with it. I started paying with cash so it hurt when I spent it, reminding me not to spend more. I started avoiding extra expenses that in the past I just bought when I “needed” them. The amazing thing that happened was I started having more money to do other things with. I started saving money for major purchases so I could get cash discounts by paying up front.

Today I’m really weird because I don’t have credit cards. I don’t have rewards miles that I’m not going to use. I don’t earn spending rewards or cash back. But most importantly, I don’t have any debt!

  • Kathy
    Posted at 09:24h, 27 October

    I disagree. I use a card that give me 1% back on everything and if I charge my gas at Sunoco, I get 5% back on that purchase. I automatically have all my monthly household bills charged to that card (have to pay them anyway) and I set it up so the credit card is automatically paid in full from my checking account at the end of each billing cycle. With 2 children in college, and charging tuition to that card, I truly get FREE money back at the end of the month. Some months I have seen a $250 credit to my charge, with that money solely coming from the 1% cash back. I manage the money; it doesn’t manage me.

    • Matt Wegner
      Posted at 09:22h, 28 October

      Thanks for your thoughts Kathy. I can see your points and where you’re coming from. I will point out that some banks are issuing debit cards now with similar rewards, but it requires you to have the money in the bank before you make the purchase. I like that system better than borrowing with a credit card and assuming the money will be there later to pay it off.

      The problem is too many of us are buying things that weren’t in the plan at the beginning of the month. That’s what keeps us spending more. I know from my experience when I stopped using credit cards and started using cash, we saved more than a few hundred dollars a month. It became impossible for us to overspend because when the cash was gone we couldn’t spend any more. 100% of credit card problems stem from having a credit card.

      There are a very few people who use credit cards who are deliberate and only spend on the card what they have the cash to pay it with immediately. For the other 80%+ of us, cutting up the cards saves more than the rewards earn.

  • Four Elements of Successful Budgets | Rewards Cards Cause Debt | Living In Financial Excellence
    Posted at 05:02h, 05 January

    […] has been talking for some time about how credit card rewards actually cost you more money in the long run. Now there’s research that supports his […]