Why I’m against using a credit card for points and cash back offers

I have to warn you. My snark meter is high right now. There are several reasons for this. The topic of the day, being one of them. Of all the groups of people that I encounter, the “charge-everything-and-pay-it-off-at-the-end-of-the-month-in-order-to-get-credit-card-rewards-and-cash-back-offers” group is far and away the most overconfident. And what the last 13 years has taught me is that overconfidence leads to financial mistakes.

I encounter at least 10 people per week via email, Twitter, or Facebook that want to argue the charge-everything-and-pay-it-off-at-the-end-of-the-month method with me. They tell me about all the rewards they get, they tell me how they pay for Christmas gifts with the rewards points they receive, and they go into great detail about how committed they are to paying off their entire balance at the end of each month. But what they don’t realize is that their logic has failed them. The discipline that’s required to pay off a card at the end of every month, opens them open to a lack of financial accountability throughout the month. Their commitment to pay off their debt at the end of each month, no matter how much it is, is exactly what gets them in trouble. Here are the reasons why:

  1. You rarely check your credit card balance mid month- People that do most of their spending with their checking accounts generally check their account balances at least twice (most likely 10 times) per month. While monitoring your checking account balance isn’t exactly the perfect way to watch your spending, it’s a helluva lot better than never checking your balance. Especially if you are trying to live lean and cut spending. People who charge everything and then worry about it later (the end of the month), don’t really care how much they spent mid month because they aren’t in danger of insufficient funds. The charge-everything-and-pay-it-off-at-the-end-of-the-month-people never approach their credit card limit during the course of the month. This means that spending habits gone awry, will not be addressed until the behavior has passed. This isn’t good. Your spending habits should be studied. How do you study them? By monitoring your spending. Have you ever had one of those weeks where stress, a sense of abundance, or the commerce fairy have caused you to spend money like it was going out of style? Join the club. Everyone has. But when you charge-everything-and-pay-it-off-at-the-end-of-the-month, you tend to ignore this problem until the bill cycle is over. No one ever goes on a three day spending bender, and then checks their credit card balance mid billing cycle.
  2. Your spending is much less consistent– Scarcity is one of the bestfinancial tools on the planet. I personally use it all the time to accomplish very important personal financial goals. However when you exclusively use your credit card to buy things, then you kick scarcity out of the equation. What’s your credit card limit? $15,000 or so? That’s about typical for someone that uses the charge-everything-and-pay-it-off-at-the-end-of-the-month method. For the sake of conversation, let’s say that you put $4,000 per month on your credit card. Since you plan on paying your credit card bill off at the end of them month, then you have at least $4,000 in your account. Right? And what is even more likely is that you have approximately $10,000 in your checking account prior to paying your mortgage and credit card bill. How do I know this? Because about 40% of your spending is discretionary spending. You know, the type of spending that you put on your credit card. My point? Between your swollen checking account and your $15,000 credit limit, you have “access” to $25,000 per month. This is a drain on anyone’s self control. You can afford ANYTHING that you want. It is my experience both as an individual consumer and as an expert, that this is a very very bad thing. Right now you might be thinking, “No way, Pete. I’ve never even considered that I have access to $25,000.” Yes you have. Your brain has. Let’s say that you go to your grandma’s house for Thanksgiving dinner, and she has a bowl of M&Ms out for everyone to enjoy. In the first scenario, she has one four ounce bag of M&Ms in a small dish for your entire family to pick at through the course of the day. How do most people address this situation? They simply pick up just a few M&M’s with their finger tips. In the second scenario, grandma went to Costco. She has an entire three gallon punch bowl filled with M&M’s. How do most people deal with this scenario? They jam their fist so far into the bowl that it looks like they are trying to rehab a shoulder injury. The large punch bowl filled with M&M’s will result in more consumption EVERY SINGLE TIME. Yet your hunger never changed. NOTHING changed except your snap judgement on the resources that were made available to you. Scarcity will help you accomplish financial goals much more than abundance will. By the way, don’t try to impress me with you giant credit limit. I’d be much more impressed if you didn’t have a credit card at all.
  3. You think you’re beating the system- Much like the guy that has a “system” for winning consistently at roulette, charge-everything-and-pay-it-off-at-the-end-of-the-month people tend to think that they are smarter than the house. The house ALWAYS wins. Do you really think these multi-billion dollar companies with their marketing and consumer behavior research departments are really giving you free stuff? Oh, come on. They are counting on you overspending, or better yet, they are waiting for your commitment to pay off your balance every month to fade. When it fades, then the interest clock starts. And don’t think the credit card companies don’t make money off of you if you pay off your balance. They have other revenue streams attached to your purchases such as swipe fees.

Failed logic #1: I get 1% cash back on purchases, how is that bad?

Many credit card companies now offer you cash back on your purchases. This means that you receive somewhere between 1-3% of what you charge on the card, in the form of a bill credit or check from the credit card company. This much less exciting than it seems. How much money do you spend each month on your credit card? $2,500? $3,500? Let’s say that you put $2,500 per month on your credit card. What is 1% of $2,500? $25. Wow, that’s amazing. You received 25 whole American dollars for risking so much more. What are the chances that you overspend by over 1% each month on your credit card? I would say that chances are about 100%. As we discussed earlier, access to copious amounts of money is a bad thing when it comes to controlling spending. I believe people that employ the charge-everything-and-pay-it-off-at-the-end-of-the-month method overspend by at least 10% per month. This means that your 1% or even 3% cash back sucks. It sucks really bad. You are actually negative between 7-9% per month. You’d be better off not using a credit card and mailing 5% of your money to Bea Arthur (R.I.P.).

Failed logic #2: I make enough money and spend enough money to make the rewards worth it.

Okay Patrick Ewing, great job. Once again, high income doesn’t necessarily mean that you are a financial genius. It just means that you make a lot of money. So you have immediately said to yourself, “I spend much more that $2,500 on my credit card. I spend closer to $10,000 per month on my card”. The percentages didn’t change. Your cash back “reward” would be $100 per month, and your likely amount of financial waste would be $1,000 per month. You can’t spend your way out of trouble.

Please feel free to argue any of these points in the comment section. Let’s learn from each other.