Five years ago, my wife and I were killing it with the credit card rewards we were receiving. That’s right…free stuff! We exchanged our rewards for airline miles, countless merchandise items and even received cash back in our pockets on some cards. It felt great! We were really beating the credit card rewards system at their game.
However, through a series of personal events and some advanced education, I realized I could do even better. I found out there was (is) a way to get more cash back into my pocket and really stick it to the credit card companies. The best part about this system was that it also improved my monthly budget and helped me save more in the long run.
What was the system I used?
Simple…Don’t use credit cards and buy into their credit card rewards system as a means to build wealth. Instead purchase items with a debit card or cash and use the savings to pay for vacations or merchandise instead.
The Credit Card Rewards System Never Worked
I realize some of you credit card holders may be very disciplined with your budget. Kudos to you! I, however, was not one of them. Credit cards never worked for me because I consistently overspent. I was constantly drawing on savings to pay the credit card bill.
When I cut my cards up, my spending decreased and my savings rate skyrocketed almost instantly. I put the money we did not spend each month into our savings account and began to save over time for purchases. Then when I had the money saved up for a vacation, home fix-it-up project or new computer, I purchased it debt free out of my savings.
The concept of spending less while using a debit card or cash is nothing new. Ever heard of the famous research study conducted by Dun and Bradstreet? They found that people who use cash for purchases spend on average 12-18% less than those who use credit cards. In addition, research by McDonalds showed that when they started accepting plastic, their average ticket went from $4.50 to $7.00. That’s a significant increase.
So how would saving 12-18% per year on purchases compare to some mainstream credit card reward programs being pushed right now? For the analysis I’ll take the average of the study and say I can save 15% per year paying for items with cash. I will also disregard any one-time bonus rewards the credit card companies offer as a gimmick to signup or as a reward when you spend a designated amount in the first few months.
Analysis #1: Discover, Chase Freedom, BankAmericard
Cardholders receive unlimited 1% cash back on all purchases and 2-5% back (up to $1,500 in purchases) in specific categories, some of which change each quarter (ex. Oct. to Dec. – Holiday Shopping). So let’s say you max out the $1,500 limit each quarter for a total of $6,000 a year at 5% back. Then, for example sake, we will through in another $10,000 spent over the course of the year at 1% cash back. Your total cash back for the year on $16,000 is $400 (6,000 x .05) + (10,000 x .01).
In this example, the credit card holder spent $16,000 for the year. According to the statistics, someone using cash over the same time frame would only have spent $13,600 (16,000 x .85). That’s a difference of $2,400.
Analysis #2: Capital One Venture Rewards
This one is for the coveted travel rewards. Cardholders earn 2 miles for every dollar they spend. So spend $2,000 per month over the course of 12 months ($24,000) and receive 48,000 miles. This many miles would net the customer $480 in travel rewards to be used on flights, hotel rooms or car rentals.
Following the statistical pattern, someone using cash over the same period would only have spent $20,400 ($24,000 x .85). That’s a $3,600 difference.
Analysis #3: Capital One Cash Credit Card
Another credit card rewards program where the cardholder receives 1% back on all purchases plus a 50% bonus every year. (That’s the same as saying you get 1.5% back on all purchases.) So, on $24,000 spent in a year using the credit card, the customer would receive back $360.
The person using cash for purchases would only have spent $20,400 in the same time frame, saving once again $3,600.
So the best deal of these five cards gets the cardholder a whopping $480 dollars in rewards on $24,000 spent. How is this a deal when it’s compared to what the typical individual would save if they switched their method of payment? Why don’t we simply use the savings we accrue to purchase things we want instead of relying on rewards from credit cards?
I don’t know why I used to think I was beating the credit card companies at their own game. They are a gazillion-dollar organization. They don’t make mistakes when it comes to marketing, understanding people’s behavior and how it impacts their bottom line. They are the ones coming out on top in this deal, not the consumer.
Though the journey is hard, the formula for building wealth is simple: spend less, stay out of debt, save and invest. The wealthy know this fact and live by it. I mean have any of us ever heard a millionaire say, “Boy, you know, it was all those airline miles and cash back rewards I earned that made me wealthy. Glad I had those or I never would have made it”?
Questions: Do you use credit cards? Have you fallen victim to the credit card rewards system? Have credit cards made you overspend or can you control your spending?
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