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 consistentScarcity is one of the best financial 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.

32 thoughts on “Why I’m against using a credit card for points and cash back offers

  1. I use credit cards exclusively.
    1. I check my balance multiple times a day.
    2. I track my spending as if it was a debit card. Every single charge takes my ‘real count’ of how much money I have to spend down toward zero.
    3. In 12 years of using credit cards, I’ve NEVER (not one time) failed to pay off the full balance at the end of a month. I’ve never paid one dime in interest to a credit card company because spending more for stuff than what it’s worth is stupid.

    All that to say, I don’t disagree with you at all, actually. I feel like I do beat the system, but only because I work fanatically to do so. Having lived on a restricted budget (being a missionary pays crap), I’ve had to work to squeeze extra dollars out through rewards programs…but it was WORK to do it without screwing myself in the process.

    There’s nothing free in the world. To make ‘rewards’ pay off, you have to work really hard at it. I don’t know that most people can/do put that kind of effort in to it.

  2. YESSSS! Thank you SO much for writing this. I’ve never quite been able to put my finger on why it sounded wrong when otherwise sane people insisted that you’re an idiot if you don’t put everything on a card instead of paying with debit/cash. Let alone the fact that you’re only getting your 1% “reward” because the credit card company took 1.5 – 3.5% from the retailer, I completely agree that knowing and tracking your balance through the month (I check at least once a day) is the first step to NOT overspending. Bravo!

  3. Agreeing with Greg’s comment above me.

    I have a credit card. Albeit a secured card that helps me build my credit, but a credit card nonetheless. Since it’s new, I haven’t made any payments on it yet. I likely won’t be able to pay it off in one go sadly, as low as a balance it is. It has no rewards, except that it helps repair my credit. So if that’s a reward, that’s fine with me. It’s also fine with me because, while it may have a higher-than-normal interest rate, I put the money on it to make the credit line. So I determine how much I can spend and what my limit is.

    I use my debit card because it’s money that I earned. It’s mine. In a perfect world, I would pay cash. Nothing to track and always accepted.

  4. I don’t think you understand how secure cards work. Your money backs the credit line in the event you don’t pay, but it’s not your money that you are spending. I have a moral objection to using credit cards at all. It is a perfect world.

  5. I pretty much echo exactly what Nate Dunlevy said.

    1) I pay off the card every month in fact its almost always the same amount ’cause that’s my budget
    2) Have for at least 12 years, probably more like 14.
    3) Every transaction is written in the checkbook and accounted for when the purchase is made and although the money is still in bank account it’s not available anymore.
    4) In fact, when I make a $13.23 purchase I write $14. Just in case we missed a transaction, there’s “extra” cash accounted for.

    With a credit card I get 1% back, am I retiring on this? Uh no. Am I gaming the system? Maybe. I guess. No. Yes? What game are we playing?

    My wife and I actually were worse with Cash. There was no accountability as to what we were spending this on. There was too much impulse buying and have found that being able to track our individual purchases to be a great way to understand and control our spending habits.

    In the late ’90s, debit cards were a hassle because they weren’t accepted everywhere or would randomly not work/weren’t accepted in some places. Online banking especially through credit unions was non-existent or if they had it charged extra fees. So we switched to credit cards which offered online access and were accepted anywhere, except cash only businesses which is almost unheard of today.

    I think you are spot on that there is definitely a group that thinks they are getting something for nothing. They use the credit card rewards to basically lie to themselves about their finances.

    However, if you go into the pay-for-everything-with-a-credit-card-and-then-pay-off-the-credit-card-every-month-and-get-cash-back strategy looking to get visibility and control over your spending habits and view the $40 credit on your bill as a sweet-my-starbucks-addiction-was-paid-for-this-month, it can be very effective.

    Can you do this tracking with cash or debit cards or a mix of all of the above, sure but credit cards make it soooo much easier plus they pay you for the privilege.

  6. I see credit cards as a tool. Just like debit cards are tools and cash is a kind of tool to pay for the things you want/need. Responsible people will use their tools responsibly and irresponsible people will use their tools irresponsibly. I agree with Pete 100% that the opportunity to abuse credit cards is great and the system is stacked against people that use them unwisely, but I also agree with some of the posters that there are people that can take advantage of the good things that come with using a credit card without subjecting themselves to the bad. Cash and Debit cards also carry some drawbacks (i.e. cash is easier to impulse buy and more difficult to track; debit cards have the evil overdraft fees and now $5/month use fees attached to them).

    I’m very curious about Susan’s comment above where she says she finds Credit Cards morally objectionable. To me, that would be like having a moral objection to using an electric drill instead of a screwdriver. I would love an explanation of this comment.

  7. Great points one and all. I agree with you wholeheartedly. I speak from experience when I say you are spot on as I just finalized my first bankruptcy ever this year due to a change in my job position. I worked hard at staying on top of everything with my financial level but was not as prepared as I should have been when it came to a drastic change (even if self implemented) in my income level.

    This is the boat that I feel around 90% of people put themselves in. “I live within my means” just doesn’t cut it. You never know what tomorrow will bring or how your priorities will change.

    For me cash is king now, and hey, if I don’t spend that extra dollar on something that I want but don’t need, then I am way ahead of all those people out there getting their cash back.

    CD

  8. Question: I do this (the use a credit card and pay it off at the end of the month), and while I have been successful with this as far as not building up credit card debt, I’m not opposed to switching my m.o. The real reason I use credit cards is that I’ve had my credit cards compromised several times and it was always handled really well by the credit card companies. Not that I think it wouldn’t be handled well by my banking institution, but it makes me super nervous to think of my debit card being compromised and that having a direct effect on my cash flow. Because I need the cash, you know for rent and stuff! At least with the credit card, it’s one step removed from my cash. I don’t like the idea of my debit card (again with the direct cash flow) being out of my sight, like at restaurants, but I feel a little better about it with credit. So what’s your take on that part of it? Am I behind the times as far as debit card security?

  9. I simply choose not to use them because I don’t feel right about spending other people’s money, even if it is temporary. I don’t expect other people to see it that way, it’s just my philosophy. I don’t have a mortgage either, I paid cash for my home. I don’t find them morally objectionable, I said for moral reasons I choose not to use them.

  10. There is something to be said also about the risk factor involved with the expendable money at the end of the month. Car accidents happen, lay-offs happen, and major factors come into play constantly. That assumed sense of incoming, future salary is a false security; if any of these major changes happen the credit card bill will probably be one of the last priorities on the list. In a perfect world we have emergency funds, but it would be pretty appealing to only pay the minimum due on the cc when you have a $5,000 medical bill in the same pile.

  11. What’s a checkbook?

    Clearly you’re the exception to Pete’s rule if you CARRY your transaction record around with you, and your family budget has been consistent every month for 14 years.

  12. We use the credit card because it is easier to appeal a false credit card charge than to get your money back on a false debit card charge. Also, we definitely use it to buy airline tickets, because you can rack up sweet airline miles that way (usually double miles). My husband travels abroad a lot for research trips, and we’ve paid for several $1500 tickets using points.

    I guess it’s easier to slip with a card. But I married a money micro manager, so slippage is not a big concern for me!

  13. @Susan, regarding this comment, and your other one below about “don’t feel right about spending other people’s money”: until you earned the money to buy your house with cash, you were spending someone else’s money by living in theirs. It’s important young people realize they can make all the right moral choices, and still end up in debt.

    @Esther brought up an excellent use for credit cards in our current society as a mechanism for repairing credit. Bravo to her for sharing, and I wish her much success. She is obviously on the right road, especially by reading this blog and increasing her financial education.

    Regardless, I imagine Pete had no intention of discussing the morality of spending other people’s money, I suspect he intends to help us do the best we can with what we’re given, and may we try not to be our own worst enemies.

  14. “We use the credit card because it is easier to appeal a false credit card charge than to get your money back on a false debit card charge.”

    That happened to me once. My bank placed a hold on my debit card/bank account and I didn’t have enough cash savings. It’s much easier to fight against “money I could spend but haven’t” than the money I actually have to pay my rent. I also put my CC charges in my checkbook and have created different spending categories (where the check number goes) so I can keep track of what I’m spending. That might seem complicated, or confusing, but it works for me and during the 4 years I’ve had a credit card, I’ve paid every bill off completely, on time.

  15. Being a “charge-most-to-credit-card-and-pay-it-off” person, I see the point in the article.

    I use a website to categorize my transactions throughout the month. The transactions for my cc and bank account are downloaded and sorted. My wife and I can see where we are spending and how things are sorting out, and it helps fight against the big-punch-bowl syndrome.

    The website I use does require effort…. you have to go through and verify the categories are what you think they should be.

    It’s very telling. I think I might eat to much.

  16. I used to do this when I was single and couldn’t figure out why I couldn’t save any money. Now, we use our credit card for big purchases and pay it off usually that same day. It’s just easier when you have to spend for an emergency or big ticket item then, later that day, transfer from the emergency fund or money we saved for the planned big tocket item and send it to the credit card company. I feel conflicted about this. I agree with Pete’s assessment and his overall feeling on credit cards, but we have been very responsible and have never paid interest in the 5 years we’ve had it. Plus, the roughly $150 check we get each year is kind of cool.

    Also, our debit card has a limit of $500 per day unless I call and have it temporarily raised. I’ve done it before, but it’s pretty annoying. To the above points about safety of a credit card vs debut card, that limit makes me feel safer about that than my credit card.

  17. I see that #1 and #2 taken together implied the same budget over 14 years. That’s obviously not true.

    But I can tell what next month’s amount will be or more specifically what it should be. We then have to make choices throughout the month about what can and cannot buy.

    Everyday I do CARRY a transaction record with me, it’s called a credit card receipt.

    I don’t think I’m the exception to “Pete’s rule” because I don’t think he was talking to me as his group has an “in-order-to”. “Jeremy’s rule” has an “and” instead.

    Big difference.

  18. I use my credit card specifically for the points all the time! But I go way above and beyond checking it once a month and paying one big bill at the end. If I am buying gas, I pay for it on my card, get done, check how much I spent and immediately pull out my phone and make a payment from my bank to the credit card company. One extra step that earns me an extra $5 a week just on gas. Yeah it doesn’t add up to a whole lot, but if I can earn $200-300 a year just on points from the gas, why not do that? I do the same think on all of my purchases. But I make sure that if I am buying something, that I have enough to pay it off the same day from my checking account.

  19. I absolutely know that Pete is dead on about this. My wife and I were always in the “use credit and pay it off every month” and rationalized that we were not spending more than we would with cash (or debit) We then became facilitators of a Dave Ramsey Financial Peace course and decided we needed to (literally) put our money where our mouth is and use cash only. Wow, no doubt we ended up spending closer to 20% less using cash (or debit). Check me if I’m wrong, but you can use a debit card but actually say “credit” and will receive same protections as credit card transactions.

  20. I buy everything on my Subaru Mastercard. 1) It pays me back 3% on all purchases in Subaru bucks, redeemable at any Subaru dealer for parts or service (or a car!) I haven’t paid for vehicle maintenance in years. 2) Purchases on a credit card can be contested (and reversed) if there is a problem with the goods or services. I have used this feature in the past, and it actually works. 3) Many credit cards extend the warranties of goods bought with their card. 4) I pay my balance in full every month, and I enjoy getting the record-keeping and convenience for free. And no, I don’t buy stuff just to get the points, I buy the same stuff I would buy if I was paying cash. I just get cash back and less hassle. Where’s the downside?

  21. We treat our credit card like a debit card. My (type A and financially responsible) husband has an excel spreadsheet that he uses daily to track our spending. He collects all receipts and enters in to the different categories in the budget. Like the first comment above, he works very hard to to this, and we do feel like we are beating the system. We use our points for Wal-Mart gift Cards that we use to buy cleaning and household supplies to save $.

    I agree completely that we would spend more if we were NOT treating the credit card as a debit card. It was my mentality many years ago prior to graduate school, and I was definitely worse off financially for it.

  22. I am so happy to read this posting Pete. I am a bankruptcy attorney and I am constantly having this discussion with my clients. I agree completely that the using a credit card and paying it off at the end of the month is a bad deal. What I have also come to understand (and from the other posts I think this is confirmed) that people will rationalize their poor financial habits until they believe themselves. I review bank/credit card statements of all of my clients and the truth is those who use credit spend typically much more on non-essentials. I am a proponent of the cash envelope system. Bottom line is that it is MUCH harder to part with cash than to swipe a plastic card and you have to stop spending on your variable expenses once you are out of cash.

  23. Interesting perspective. However, to play the devil’s advocate, I would say that the reasons you outline have nothing to do with the rewards aspect of it as opposed to just using the card incorrectly. It seems that your objection isn’t the notion of getting rewards as much as the notion of putting everything on the card. Rewards can be a good thing as long as they don’t cause you to be irresponsible with your money or your credit card.

  24. Amen to the scarcity! It sure helps saving up for something when your paycheck dumps it into a separate bank account every two weeks! I liked your M&Ms analogy!
    Here’s an interesting thought…is it plausible that credit cards are ruining people’s ability to be charitable because people no longer rely on each other, but rather they rely on the omniscient credit card to help them out.

  25. In general, I agree with you Pete. I can’t stand people who just charge everything and then worry about it later. However, I am one of the few who doesnt check their credit card balance mid-month… I check it Mid-week, and the beginning of the week and the end of the week. It drives my wife insane, but I treat our credit cards like debit cards and using Quicken (on my phone, iPad and computer) can tell you the balance of either of our given credit cards (and checking and savings and investments etc) at any time and balance all of our accounts 3-4 times a week.

    I really enjoy your column and overall agree with most of your principles, but I do think there are exceptions to the rule. That being said, I know that we “overspend” in my opinion in our household, but in our situation, don’t think that would change if we switched to debit only because we would still have the cash to overspend. The ONLY time we have ever not paid off our balances is when we opened two credit cards to pay for our wedding rather than depleting our savings. We got interest free for 15 months (plus the rewards of course) and committed to paying them off and did so in about 7. All that to say, for me/us, having that credit card debt over our head, even though it was interest free, and seeing that negative cash value for a few months was a renewed committment every time I balanced our finances to not overspend (and in turn my wife, because I preach to her our financial stability)

  26. Simply set the credit card up for an automatic payment in full each month from your bank account, treat it like a debit card, and all of the rewards are truly extra at that point. This can work if it is treated like your debit card and one exhibits some discipline.

  27. I have to jump in here. Have to. My husband and I are what you describe. And, while you make valid points for some people, some of your points are overreaching.

    1. We both check our credit card balance about every other day. We both have a set limit on what we can spend and neither of us ever go over. I personally check my balance more obsessively, because I know that I will have to pay it off at the end of the month. This point does not hold with us and I assume other people as well.

    2. This too is false for us. I spend xx amount on gas, xx amount on groceries and xx amount of my personal spending. My husband is the same. Once we charge that amount on our cards, we are done. Also, we don’t go into it with the mindset that we have our credit card limits a month to spend. That is asinine and I have never known another person to think like that.

    3. No, we don’t believe we are beating the system. But, credit cards offer positive logistics beyond just rewards. If one of our credit cards is stolen, we cancel the card and aren’t liable for any charges we didn’t make. We are never out a dime. However, if our debit card is stolen, thieves can then drain our bank account. Even if we get the money back eventually, we are in a bind waiting in limbo. Also, you don’t always get your money back when your debit card was stolen. My sister’s debit card was stolen and they used it for $150 at Wal Mart. My sister never saw that money again because her big, well known bank said that the purchase was too close to what she does. So, that is $150 she never saw again.

    4. We don’t use our credit card system for rewards, but, we do appreciate them.

  28. You are making a massive generalization that ALL people are fiscally irresponsible. You are also making a false assumption that checking your credit card account is harder and less reliable than checking your bank account. Perhaps this was so in 2011 but currently, in 2015 credit card purchases go through at about the same rate, if not faster than debit card purchases. The truth is, if you responsibly use a credit card to spend money that you ALREADY HAVE, you are benefiting in two ways: 1) your money is earning interest for about a month and a half in your OWN savings account before you have to pay your bill. 2) you are earning cash back that you didn’t have before.

  29. I really like you as well as your education but disagree with the generalizations in this. I think it depends on the individual and the financial discipline they have. My husband and I are completely debt free EXCEPT for our monthly credit card bill. I put everything I can on it…including our homeowners and auto insurance. Here is the difference, we treat it like a debit card, we do not charge anything we can not pay for and pay the bill completely every month. I frequently make multiple payments in a month because I don’t like to see the balance creep up. Our account is set to automatically be paid in full every month so I can not screw up. Worse case scenario, we overpay what we owe because of this but know if we were to pay interest it decimates the cash back we like to receive. I also receive notifications on any transaction over $200 and receive weekly balance summaries, which I don’t need because I look at our balance every other day. Our cash back really adds up (put daughters college housing and sorority dues on it because there was no penalty for using a cc, that was one heck of a nice reward) but the key is, we have the money to pay the bill…and do so. It would be a nightmare to charge thousands of dollars in college housing IF the $ wasn’t all ready in our savings account, so it was easy to move it to checking, wait for the charge to clear our pendings and pay it off right away. We are cheap and frugal, my husband does our grocery shopping at Meijer and will fill the carts, both to $50 after coupons and have them ring it up separately because they have a $5 off $50. So we save $10 on $100 instead of $5. It all adds up! The key is though, we make it work for us, instead of working for it. I have frequently shown our college age children our cc statements with the box that tells you what it will cost if you make minimum payments and how many years that takes. It makes them want to yak up a lung and that’s exactly my point. They are beyond debt averse. So, if it causes people to be tempted, then step away, but for others it’s a great tool if used appropriately. End of my soapbox rant.

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