The Dangers of Rewards Credit Cards

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“Be careful”!  I say that phrase countless times in my daily life to my adventurous four-year-old.  You’re climbing up the rickety fort, “be careful”!  You’re riding your Untitled designbike down the sloped driveway, “be careful”!  You are getting thrown in the air by daddy inches from the swirling fan, “be careful”!  I try not to over-use “be careful”, but four-year-old life is just kind of always one or two steps away from disaster.  The truth is that the “be careful” mantra also applies to the rewards credit cards I talk about here.

There’s absolutely no denying that big travel rewards come quickest and easiest from rewards credit cards.  The sign-up bonuses are like massive shots in the arm of our hotel and airline award accounts, and the rewards just start there.  I use a variety of rewards credit cards in my daily life to maximize virtually every dollar that my family spends.  If you would have told me 20 years ago we would be charging a cup of coffee, even my then junior high aged brain would have said that’s a pretty bad idea.  If you can’t afford that cup of coffee with cash, do without.

However, my use of credit cards has evolved far beyond using credit for things I can’t afford right away with cash.  Instead, I charge virtually everything, and then pay the bill off at the end of the month.  The goal is to not buy anything with a credit card you wouldn’t otherwise buy with cash, and of course then pay the bill off monthly to avoid interest charges that will very quickly eat away at the value of the rewards you earned by using your card.  If you do all that correctly, then you then get lots miles and points for simply paying for things you had to pay for anyway.

That all sounds perfect, and it pretty much can be.  But, we are all humans, and inherently all imperfect.  This “perfect” plan has the potential to become imperfect and expensive, so I thought it was time to devote a post to a few warnings around this method of personal finance and reward earnings.

Go Slowly, This Isn’t a Race:

When you first discover the world of rewards credit cards, the inclination for some is to go from bank to bank “trick of treating” to see how many rewards cards they can open up into their bucket at once.  The rewards are great, but unlike with Halloween, this isn’t a “one night only” opportunity.  This is something you can be in for the long haul, so start slowly and don’t feel the need to open up tons of accounts all at once.

That can result in the banks viewing you as a credit risk, and if you aren’t organized it can result in missing payments or minimum spending deadlines if you don’t have a very good system in place.  Start with one or two, develop a tracking system, and go from there.

Get Organized:

I mentioned this already, but if you are going to dramatically change the way your family handles their finances, then you need to get organized early on.  I recommend setting the due dates for your cards on the same date.  You can call the banks and ask for this, and usually your request will be granted.  If you have tons of different cards, all with different due dates, that is the recipe for an accidental late payment.  You can also auto-schedule at least minimum payments for cards if you are afraid you might be traveling and forget to take care of making the various payments.

You also need a system to track minimum spending requirements, renewal dates, etc.  Use excel, draw a system on paper, use an online tool, just do something to get organized early on so you don’t have a mess to untangle down the line.

Be Honest About Your Spending:

The previous warnings are the easy ones to manage in my mind.  This is the harder one.  Myself and others often say something along the lines of  “don’t spend more than you otherwise would” on your cards, but I know that is easier said than done for some people.  There is no perfect way to solve for this other than self-examination and honesty, but I highly recommend that think about whether you have the restraint to not spend more on a credit card than you would with cash.  If you don’t think you can manage that, then stay away from the world of rewards credit cards.  You will be better served looking for travel deals you can pay for with cash than trying to earn rewards by spending on credit.

If you are already into the world of rewards credit cards and find yourself spending more each month on purchases than you did on cash and debit cards, then take a hard look at whether that is worth it.  Perhaps you can adjust your spending patterns back into alignment, but if you can’t, then this isn’t the best method for you.  If you are using credit cards primarily for the rewards, but find yourself then paying interest or spending more than you otherwise would with cash, then you are on the losing end of the equation.

In my 3.5 years of writing about this type of stuff, I only personally know one person who has gotten a rewards credit card primarily for the travel rewards, and then maxed it out on unneeded items.    I know hundreds, even thousands, who have used rewards cards successfully to maximize the purchases they were going to make anyway.  However, even though I only personally know of one person who got a rewards card and then came up on the losing end of the financial equation, the risk is there for that to happen for others if you aren’t careful and honest with yourself.

This post isn’t meant to scare anyone away from using credit cards responsibly to earn massive rewards, as it can be done very safely and effectively.  But, no one method is perfect for everyone, so as a mom I have to throw out a few “be carefuls” every once in a while.

 

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Comments

  1. This is very informative post, mommypoints! Thank you. I do feel after going to FTU or reading all these blogs it is easy to get carried away and simply apply for 5-6 cards every 3 months. I only had the courage to apply 2-3 cards every 3 months since that’s what I felt comfortable with.
    I grew up in a family that was very careful with credit and who always told me to treat credit cards like charge cards (meaning, pay them in full each month). I’m still that way but I have definitely made purchases that were unneeded (i.e. ebags 35x last year) but I did not spend beyond my means.
    I already told myself that for 2015 I will take a break from app-o-ramas since I plan to buy a home in 2 years.

    • Joey, sounds like a good plan. To be real, I am not immune to splurging on something every now and then (like maybe a new bag?), but if I wouldn’t have splurged without a rewards credit card then that is where I think the problem lies.

  2. What I do is set up online banking so that I pay the bill directly from the bank and not to pay on the credit card website. This way there is no limit to the number of payments sent. Then once a week or so I pay off each balance so by the time the statement hits, my goal is for it to be $0. This keep me from overspending because I know that I will be paying the bill by the end of the week. If I’ve made a major purchase, I’ll sent the payment when I get home.

  3. Thanks for injecting a note of sanity. I’d just throw out there that for every one person who maxed out their credit trying to game the rewards you hear about, there are going to be tens if not hundreds that you don’t hear about. It’s human nature to brag about success, not failure.

  4. Great note Summer. It’s only a game if we are winning. It’s a dangerous hole if not used appropriately. If you can’t afford to pay, you can’t afford to play.

  5. Mommypoints,

    1) If I have three cards open: Chase, Alaska, United, and have received the bonuses in all three and the year is coming up and I don’t want to have to pay the renewal fee; is there a downside in canceling (loss of miles, etc.)

    2) If I cancel the card, can I reapply for a new bonus a year or two later?

    3) Do you call the card up and ask for retention bonuses to offset the renewal charge for the cards or just ask them to waive the fee? (It seems ridiculous that I have to pay to keep the card for another year.)

    • 1. With Alaska & United, you won’t lose your mile. With Chase UR, you will lose them if you cancel without transferring them out first. Another reason you may not want to outright cancel the cards is that you shrink your available credit, which could lower your credit score. At least with the Chase card, I would instead downgrade it to the Freedom or Ink Cash, depending on what card you have. You won’t lose your UR points this way, although you won’t be able to transfer them out to airlines either. If you do open an Ink or SP later on, you will again though.

      And with the United card, I would see if I could get the credit line transferred to the Chase card before canceling. If you decide to open a card from Chase later on and they are wary of approving, you can suggest moving a bit from that line so they aren’t actually giving you more credit.

      2. With Chase cards, you can apply for the same card two years after your last application. I don’t remember BofA’s policy.

      3. You can certainly ask for a retention bonus or waiving of the annual fee. Some banks/cards are more generous than others. Barclay has been the most generous in my personal experience.

  6. Before I got involved with travel hacking, my wife and I got really strict about our budget to pay off cars, student loans, etc. we found Mvelopes which is an online envelope system that links to your bank account and credit cards. It works just like a traditional manual envelope system that Dave Ramsey uses, but you can still use cards. When you make a transaction with a reward card, you assign it to the envelope you want the money to come out of, and them mvelopes transfers money from that envelope to that specific cc envelope so you have the money at the end of the month to pay off each credit card. It has been an amazing tool on this travel hacking journey! Hope it helps others as well!

  7. I have paid for everything with cc for years with the mentality that I only buy what I can pay off. I haven’t carried cash in about 20 years. Not a million miler by any means though… In fact, when I have cash I feel like I blow it. lol Also, it tracks all my spending so I have years of records. I’m old school and I want my bills sent to me, much to the chagrin of the cc companies.

  8. I’m not as good about this as I probably should be. I never spend beyond my means, and always pay off balances in full each month, but I know there’s a psychological toll when spending cash that you don’t get using a card.

    The most organized person I know uses cards for rewards for all his spending. But he literally pays himself in the cash for doing so. He starts out each day with cash in one pocket, and every purchase he makes he moves the cash to another pocket. While I can’t see myself doing this, it is a good way to get the psychological impact of shelling out stacks of $20 bills that you don’t get with credit cards.

    @Josh – I’m going to check out mvelopes, that sounds intriguing.

  9. Another way to ensure credit card bills are always paid in full on time is to schedule automatic payment of the full balance due each month with the credit card issuer. In my case, I schedule all payments for the last half of the month, and ensure there’s enough money in the account by the 15th to cover them. As a precaution, I also have overdraft protection on the account (which just charges interest for the days it is used, so if I pay it off within a few days the cost is minimal).

    Also, if you have an actual business or rental property, and pay business taxes with the card, the fee (typically 2-2.5%) is deductible on Schedule C or Schedule E, which in many cases makes the net after-tax cost of the fee reasonable for the benefits gained.

  10. I tried out an app-o-rama with some credit card recommendations from your blog and a few others as well. I went a little overboard trying to meet my minimum spend. My fault, I know. But I’m still paying some of those cards off, and just read the blog for fun these days.

    As a reader, I probably don’t count as someone you know personally… otherwise you can change the # of people on the losing end of credit card rewards from 1 person to 2.

  11. Only issue I have run into is a credit score drop due to carrying a high balance in comparison to my credit on that card. Even though I pay off the card each month. I started having to watch that and pay off some of the balance.

    Pete

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