Call me weird, but I like looking at the Top 10 “Trending Now” topics on Yahoo. I want to see what people are searching for. Today, one of those topics was “Rewards credit cards”, which made me shake my head and roll my eyes.
Believe it or not, I’m not anti-credit card like a lot of financial professionals. I’m okay with you having one and even using one periodically (GASP!). But I don’t think they should be used as your emergency fund or to get you out of a pinch because of poor financial planning. And I especially don’t believe you will become rich by switching to a rewards credit card.
But What About The Deals?
There are some amazing “deals” out there these days, with many credit card companies offering 1-5% cashback on your spending. I suppose I can understand why that seems pretty tempting to most people. Rewards credit cards make it sound like they are giving you free money. Unfortunately, cashback deals aren’t all they are cracked up to be. That perk fails to inform you just how much your spending will increase and how that increase in spending completely negates any benefit the reward provides.
A Dunn & Bradstreet study found that people spend 12-18% more when using credit cards than when using cash. And McDonald’s found that the average transaction rose from $4.50 to $7.00 when customers used plastic instead of cash. The McDonald’s study represents a 47% increase just because someone walked into the fast food joint and used a credit card instead of dollar bills.
So while yes, you get cash back with a rewards card, you’re not going to actually end up saving or making any money off the cash back feature. The simple act of using a credit card is likely going to increase your spending more than had you not used the card.
Only Use Credit Cards for Planned Expenses
For the small percentage of the population that uses reward cards for fixed expenses, pays it off every month, and is incredibly disciplined with their budget, this advice may not apply to you. If you using the card for an allocated expense, then whipping out your rewards card makes sense. You are spending money that was already budgeted.
However, for the rest of us, simply put credit cards encourage you to overspend. And the awesome rewards you’re earning may not be enough to offset your increased spending. By all means, have a rewards card in your wallet or purse, but don’t spend in order to get the rewards. Use it for a planned and budgeted expense. That’s it. No exceptions. And then pay it off right away so you don’t accumulate interest.