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Are Credit Card Rewards Worth The Risks?

mouse trap

I used to be a huge Dave Ramsey fan.  We were trying to pay off our consumer debt and his messaged hooked me.

Dave says to pay off your credit cards and cancel them… so, that’s exactly what we did.

I wept as I canceled and destroyed my Cabela’s card.  That account was about 8 years old and responsible for thousands of dollars’ worth of idiotic purchases.  Good bye… sweet, sweet Cabela’s card…

It made sense for us to destroy the cards back then.  We were $109,000 in debt, our financial habits were poor, and we were actively trying to get ourselves out of this hole.

Now that our financial habits are stronger and we’re debt-free, I wonder if we’re leaving money and opportunities on the table by not using any credit cards.

The personal finance community appears to be rather split on this.  On one side you have your Dave Ramsey purists.  Credit cards are the devil, if you own one your financial life is sure to end in ruins.

On the other side of the fence, you have your travel hackers and other folks in the FI community that like to suck up that “free” money from credit card rewards programs.

Who’s right?  Beats me, but we can work through this together.

Credit Card Cons

credit card

Credit card debt has recently moved past mortgages as the most common type of debt held by Americans, and it doesn’t appear to be going away any time soon.

Let’s look at some terrifying statistics:

I’m going to shock everyone here… American’s have a tendency to live above their means (GASP).  I know, I know… you don’t believe me, but it’s true.

Adding insult to injury, the poor souls that carry a balance over month to month are paying an average of $855 a year in interest…  Giving $855 to a credit card company on an annual basis makes my eye twitch.

Better yet, using a credit card can lead to over-spending.

A 2001 study tested this theory, and found that participants paying with a credit card were willing to pay 113% more for Celtics tickets compared people paying with cash.

Credit Card Pros

I did small experiment on Twitter. I simply asked “Credit Cards… Good or bad?  Sell me on your thoughts?”

Debtandcupcakes twitter post

The responses mainly focused on the rewards programs, and one story about how a credit card ended up saving TheseChicksInvest $1,340!

Thesechicksinvest twitter post

Credit card rewards programs seem to offer some perks to the disciplined spender.

The Discover It Cash Back Card offers 5% back on purchases at certain locations.  Discover will also match all of the cash back you’ve earned at the end of the first year!  To many folks in the F.I community this appears to be “free money”.

The Capital One Venture Card offers a one-time bonus of 50,000 miles when you spend $3,000.  That equals $500 in cash you can utilize toward travel.

The Capital One Quicksilver Card offers a seductive $150 dollars back on a purchase of $500 or more (if made within 3 months of opening the card).  Also, they have a pretty appealing 0% APR for the first 15 months.

Finally, the idea to use a credit card to build your credit score came up a few times.  Although true, I’d proceed with caution.

Credit utilization ratio is a big deal when calculating your credit score.  Credit utilization ratio is the total amount you owe divided by your credit limit multiplied by 100.

Keeping your credit utilization below 30% is ideal.  Here’s where the caution comes in, if you have a credit limit of $2,000, it will only take a $620 purchase to surpass that 30% goal…

Will surpassing 30% for a short time spell disaster for your credit score?  No, probably not… but I don’t know many folks looking to lower their credit scores.

Risk vs Reward

mouse trap

Is the risk worth the reward?

Meh, I don’t think so.  I know for a fact I tend to over spend when I use a credit card.

Purchasing something didn’t sting nearly as much because I never had to separate from my cash.  Buying something expensive didn’t feel real.

Swiping a plastic card didn’t stimulate the pain sensor in my brain like watching my bank account dip.

I was always able to rationalize my spending because I thought I was getting a good deal and I could pay it off soon, but let’s be honest… I never did.

The balance just sat there accruing interest and preventing me from getting out of debt.

With that being said… I was in a different place back then.  My financial literacy was much, much lower.  I didn’t recognize, or care that I was over-spending.

Now that I understand budgeting and have a small grasp on personal finance, I see the benefit to using a credit card in certain situations.

Cash back and travel hacking are intriguing.  Spending money and getting a percentage back seems like a no brainer.

Although, credit card companies aren’t looking to just give money way.  Don’t be naive, they know exactly what they’re doing.

Getting you to open the account is only step 1.  I’m fairly confident they know you’re statistically likely to over-spend, and they will get that $150 back in due time.

So, what kinda person are you?

Are you sure you can keep a firm grasp on your spending?  Or, are you the person who will rationalize spending an extra $150 because you’re getting it back?

Will you be disciplined enough to pay your balances off each month?  Or, will you be one of the 43% that pays $855 a year in interest?  I mean, $855 isn’t so bad if you got $150 for free… right? (sarcasm)

Final Thoughts

I think I’ll be staying away from credit cards… for now.

Much like an addict, I don’t need to tempt myself again.  It took us a long ass time to get out of debt and I don’t want to do that shit again.

With that being said, I’m not going to turn my nose up at an opportunity.  My wife and I haven’t traveled a lot, but I think we might try a travel hack trip in the coming year or so.  I can rationalize it for a blog post. (smirk)

What about you?  What are your thoughts on credit cards?  Do you use them?  If so, how and why?  I’d love to hear from you!

10 Comments

  1. I’m such a cheap bastard that I’ve never had an issue with credit card abuse, thankfully! But I have such mixed feelings. On one hand, I’ve never liked them as a concept because I feel like they prey on certain people to the benefit of others. On the other, a credit card (well, three!) saved my education as a last resort when I was completely broke towards the end of my degree and otherwise wouldn’t have been able to continue.

    Maybe they should spend some of their earnings on fewer rewards programs and more debt forgiveness for those who desperately need it.

  2. This is a very timely post for me because I was just considering an offer I received last night. Like you, I struggled for a long time with credit card balances and overall debt. That is, until I did the Dave Ramsey Total Money Makeover.

    I never did have the courage to cut up my credit cards, but I didn’t use them for about two years when I was paying off the debt in 2013 – 2015. Now that I am out of debt (except my mortgage) I do use them occasionally, but definitely feel like I overspend on those occasions.

    The funny thing is that, now three years after becoming debt free, I actually think more about cancelling the cards than I ever have before. I truly think you would be better off without them. The rewards are just a trick to make you spend more money now, but I think in the long run they are just too complicated to keep up with. Keep it simple.

    Despite what may work for some people, saving up for purchases makes me really think about spending that money, and seeing my bank balance go down helps me really have to justify my purchases.

    Good luck with what you decide. I would suggest you keep doing what you are doing and not worry about credit card points/miles.

    • debtandcupcakes

      October 11, 2018 at 7:29 am

      Sounds like we were in similar situations! I don’t think I’ll be using them anytime soon… Appreciate the comment!!

  3. FYI, closing your oldest card will also lower your credit score, according to credit simulators like CreditKarma.com. The longer you have maintained a credit account in good standing, the better your score.

    • debtandcupcakes

      October 11, 2018 at 2:48 pm

      You’re correct. Although, my score dramatically increased after closing it. Probably debt related. Dunno…

      • Good point. Whittling the debt down is key to a better score! It sounds like a stronger determiner of the score is pure debt-to-income ratio over debt-to-available-credit and the length of maintaining credit accounts in good standing. That being said, since there are annual fees on my cards and I do use the rewards I earn, from a reasonable amount of spending on those cards, I’m hoping to come out ahead on all three factors. But my focus now is on getting my last card balance down to $0. Can’t wait! Thanks for the inspiration.

  4. There are so many ups and downs and viewpoints on credit cards. It’s like the whole rent vs buy conversation… you can run the numbers until your eyes bleed but it is all dependent on each individual’s situation. They are definitely helpful for building credit, but paying off your student loans, mortgage, etc also helps improve your credit. Right now I’m trying to plow through my credit card balances and then I’ll be putting them all in a drawer except for one I will use as a main one. It’s the Amazon Prime card – I shop at Whole Foods and Amazon a lot so the extra discounts and cashback rewards that the card offers for those works for me and my current lifestyle. I think if a credit card is going to serve a specific purpose, like to help you travel hack or give you more discounts at places you frequent often, then they could be a good move (used responsibly of course!)

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