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!