Stop. Get off the internet and rethink your life choices. Do not pursue the credit card points game – this game is not for players who don’t have their spending and impulses under control.
To be clear: this blog is not against debt. Debt is a useful tool in the modern economy. Few of us can afford major life purchases like homes, cars, and college educations without financing them with debt.
That said, consumer credit card debt is a trap.
Consumer debt products (like credit cards) are the banks’ way to get you thinking about your purchases in terms of monthly payments, obscuring all considerations of real value.
Here’s a secret
Sales agents in all kinds of industries – cars, electronics, home appliances, fine jewelry – are trained to overcome prospective buyers’ objections about the retail price by re-framing that price as a monthly payment. They’ll speak of “special financing offers,” as if they’re doing you a solid favor by allowing you to pay well above retail price for their wares.
Search the internet for any minimum payment calculator – here’s one – punch in your balance, interest rate and minimum payment numbers, behold how the universal laws of mathematics prove you’re a sucker.
Take this hypothetical example: imagine you’ve spent $3500 on a new gadget or designer purse, reasoning that it’s “only” going to cost you ~$107 a month (the minimum payment on your 24.99% APR credit card). A few weeks later, after the hedonic pleasure of a new material acquisition has worn off, you’ll still have another 4+ years of payments before your card is paid off.
It gets worse.
Not only is your shiny gadget out of date, or your it-girl purse out of style, by the time you’ve paid it off, you’ve also spent over $2,000 on interest payments, in addition to the original $3500 purchase price.
Madness.
Long story short, if you’re carrying a credit card balance, you’re playing the bank’s game and you’ve already lost.
Is this a game you’re ready to play?
The credit card points game is not for you if you:
-make minimum payments.
-have a history of late payments or overdrafted bank accounts.
-have a poor credit score – the good news is that you can rehabilitate your score.
-don’t (yet) understand terms like grace period, annual percentage rate, or statement balance.
–Don’t have your financial priority stack in place:
- Income > Spending
- Debt is either zero or completely reasonable
- emergency savings is set up
- investments for retirement are in place
- credit card points gaming can commence.
There ain’t no such thing as a free lunch
Even those with pristine credit histories and excellent scores will have high annual percentage rates (APRs) on their credit cards. In the event that you go bankrupt, the bank can’t get its money back from you, so to compensate they charge outrageous interest rates to all their clients. Over time, these interest charges will substantially increase the total amount you owe, making purchases more expensive than their original price, and completely overwhelming the rewards, travel points or sign-up bonus you earned on the purchase in the first place.
Returning to the example above – if you made that $3500 purchase on a new card with a sign-up bonus, you likely scored $600 – $1000 worth of cashback or travel redemptions depending on how you valued those points. But you still paid the bank over $2000 extra in interest charges. You don’t need a PhD in math to understand that you’re paying the bank a bigger number over time than the bonus you received.
Other considerations:
Credit utilization ratio – the amount of credit you’re using compared to your credit limit – is another factor that goes into your overall credit score. Paying your monthly balance in full helps keep your utilization ratio low (ideally under 30% of your total credit limit), which in turn helps keep your credit score high, making those sweet sign-up offers and high-end cards available to you.
Carrying a balance can also lead to a psychological “F* it” break point. In our example, your minimum monthly payment is $107. Tossing another $1000 charge on that account “only” raises your payment to ~$139, which seems like a bargain to a brain that’s entered “F* it” mode. That additional purchase will also extend your payment period out to 8+ years, setting off a cycle of debt, bad decisions and self-loathing, especially if you continue to make new purchases on your card while still paying off old balances. This can quickly lead to a situation where your debts become unmanageable.
Level Up: Take Advantage of Grace Periods & Promo APRs
Most credit cards offer a grace period, which is the time between the end of your billing cycle and the due date for that cycle’s payment. By paying your balance in full each month, you can take advantage of this grace period, essentially enjoying an interest-free micro-loan on purchases made during the billing cycle.
Intro 0% APR cards are another tool to make the bank’s games work for you instead of against you. If you have the cash for your $3500 purchase in our example and the discipline to save it, you can safely make the purchase on a 0% APR card while you stash your cash in a savings account or CD while you make minimum payments. You’ll effectively get a 0% loan AND make a little profit, as long as you (very important!) pay the balance in full by the end of your promo period.
Credit cards are a tool of the banks to get people to play their game – finance everything, don’t think about the price of any purchase, instead think of the overall monthly cost of your lifestyle. When you play the points & rewards game and follow the rules closely, you’re playing a different game. Let the suckers pay homage to the fee, we pay the homer tax fly for free!