Credit Cards- A Way to Get Ahead or What is Holding Us Back Financially?

This article is going to have personal examples, but it does reflect how we feel at Cents of Time. We wanted to put that disclaimer up front.

Credit cards. They can be looked at as essential to everyday finance, a way to help build wealth, and a good return on investment. They can also be viewed as what is holding many poeple back financially who don’t have the self control or self disciple to handle them responsibly. We understand the benefits of credit cards and are not against them per se, but we have some reasons why even if some people can use them responsibly it may still not be the best choice.

  1. Just in Case- This example may not apply to everyone, but it definitely applies to some. Many people are living paycheck to paycheck (The last number we heard was 70%) so it makes sense that credit cards provide that “just in case” line of thinking and option. It all also makes it harder to track how much you are actually spending unless you are someone who budgets and plans out your spending. It can become easy to just put purchases on a credit card and worry about them later. The other issue is that many people not only are living paycheck to paycheck (not everyone), but they do not have much or any savings. When something “unexpected” happens and there is no money to use to cover that emergency, where do you most people then turn? Credit cards. Even if you don’t think of credit cards like that and do have a savings whether it is small or big, the option of using credit cards like this is always there.
  2. Think Small Not Big- What male doesn’t love Best Buy, right? What female doesn’t love T.J.Maxx or Marshalls? Heck, these are popular stores for everyone! Both have reward programs with their credit cards where you get rewards back. The problem is it is such a small amount and you have to spend so much to get there that it does not really make sense when you break it down. At Best Buy you get 5% back for every $100 spent so $5 is the return on investment. That is not a good return on money unless you are upgrading your tech every few months which is what Best Buy wants, but maybe not you. $5 should not have any influence on your spending or purchasing decisions. It just isn’t enough money to worry about. T.J.Maxx has the same credit card rewards program. You have to spend $100 to get $5 back, but they have a more confusing points system to make you do the math. These are some store examples of credit cards, but if you are going to use credit cards do not use these options even if they work at places outsides of the actual store. Getting a small amount of money back after you have to spend money to get it, is not a good way to build wealth. Getting actual cashback or rewards that come out of purchases you make regularly throughout the month to cut down on your actual spending is the only way we could consider. This leads us directly into our next point.
This is Best Buy’s credit card options.
Now that interest is a good return on investment! Too bad you don’t get it, but Best Buy and the bank does if you fail to pay your bill on time.
T.J.Maxx’s rewards is a little more confusing then Best Buy’s, but it is mostly the same amount that you are actually getting back.
T.J.Maxx’s APR is not any better.

3. Credit Cards Cause You to Spend More- If you look at the examples above it is easy to see why. “Oh, I get points back and rewards if I just spend a little more” or “I am so close to getting a reward, maybe I will buy that one extra thing that I may or may not need.” We will repeat what we said before, spending more money to make money is NOT a good strategy in the long term. Retail/online shopping should not be considered an investment in your future. Our family still has a Discover credit card that we have not closed yet. We have not used it in years, but we just never got around to actually closing it. I am sure (or at least hope!) that there are better reward programs out there than what is offered here. Just for fun we looked in the cash back program on it. For cash back you only make .025% on purchases until you spend $3,000. Now if this is your main card then that shouldn’t be too hard, but until you spend $3,000 you will only make around $10. After $3,000 you make 1% back. So in that same $3,000 example you are now making $30. Then each quarter there are certain 5% cash back areas. Yes, everyone needs gas and groceries which are two of the categories, but there is a cap on how much you can earn back and some of the other categories you may or may not use. Do you want someone else telling you where you should spend your money or do you want to make the decisions of where you want to spend the money and where to get the best deal?

Looks like in Q4 you should only shop Amazon, Target, and Walmart. You should also only shop online as well.

4. Moral Issue- This is where everyone may not agree with us, but we think that everyone can at least agree that some (or a majority) can not handle using a credit card responsibly. There is a reason credit card companies stay in business. A credit card’s allure is either the rewards it gives or the fact that it allows you to buy things you otherwise could not have afforded. If there are a majority of people that are struggling financially and have consumer debt holding them back because of credit cards, if we want everyone to get ahead and get their finances in order, would the first thing we do is to tell them to get a credit card? No! We would say this is something you can not handle and take it away. Since spending is very personal, it can easily look hypocritical that I say you can not use a credit card responsibly, but I can. We don’t know what goes on in your bank account, but many statistics say that more people than not are not using credit cards “correctly”. This means unless we are going to start sharing our statements online, it is very easy to judge others when we might be struggling too.

5. If Everyone Did it Right- This is a pretty easy one, but if everyone paid their bills on time and maxed out their rewards, how would the credit card companies stay in business? Easy answer, they would not! Where would they generate their income and make up for paying all of their expenses? Instead they can offer high fees and low rewards and we buy into it like it is a good financial thing to do. This ties in to the last point of example #4. If credit cards are looked at as a tool to build wealth, why are debt levels increasing? Shouldn’t they be decreasing because we are just using them for rewards?

6. Simplify- This is a blog about time and money. We hope to show you how the two are connected in ways that you might not think of. We think money is a valuable resource, but time is your most valuable, nonrenewable resource. Anything and everything you do you should think of the time investment it will take. You should also factor in mental energy, stress, and risk when making decisions as well. To us the most simple way to spend money is by debit card or cash. Using technology like PayPal, Samsung Pay, Apple Pay is fine too, but when you start throwing in one or even multiple credit cards, plus all of those reward programs you are a part of, it can get really hard to keep track of what really is the best deal. Not to mention it again takes the control of the spending further out of your hands.

Now we say all this and while not scientific by any means, society and Twitter disagree with us. In a 5 day poll with 51 votes, 75% of people use a credit card at least once weekly. That means that most people are actively using a credit card. What are their reasons? Here are a few of their responses.

https://twitter.com/momm_uk/status/1154728381939953665

You can read all of the responses here, but credit cards are a way of spending for most people. We are not trying to sit on a throne here and say that if you use you credit cards you have no financial intelligence. If anything we are saying show us how you do it! Maybe we are looking in the wrong spot or at it the wrong way. In our personal experience and research though, there are many factors with credit cards that change your approach on finance to think small, not big and also give up control of your spending. When we talk about a simplified, organized life having to track, prepare, and manage credit cards seems like just an extra hassle. We say that though and if you can show us a credit card that pretty easily makes $50-$100 cash back a month (or rewards that are valuable) then we might consider it or at least test it for awhile.

Let’s say your monthly budget is $5,000. The rewards have to fit in that $5,000 monthly budget otherwise you are spending more than you would which connects back to point #3. To make just $50 spending everything on a credit card per month you would need to make 1% back. That isn’t bad, but, and here is the big but, and where most people fail, you need to be PERFECT to make it work. This is a bare minimum example. You need to set up EVERY expense to go on 1 credit card (unless you really want to max out and add more, but that adds more complexity and risk) and need to NEVER miss a payment or get charged a fee. The problem with credit cards is if you miss a payment or forget to make one and get hit with a fee, you lose some of that “profit” you just gained. You can see how hard you will get hit with interest too in the above Best Buy and T.J.Maxx examples.

One last point on credit cards and then we cannot wait to hear your thoughts on our views and if we can be proven wrong! Using again the example above, if you made just 1% back or even 5% back in an investment, would you say that is a good investment? 5% is barely staying above inflation. If you wanted to get these rates you could open up a simple savings, CD account, or bond and be in this same range. Most people agree that those are not the best investments yet credit card rewards and cash back are looked at like they are. You would at least be encouraging saving and not spending using the other routes. This is a great example where money and time are connected. You need to ask yourself a simple question, is it worth the time investment of tracking and managing credit cards to make 1% to 5% back? Or is a more simplified, slower paced, but with less risk and more of a focus on saving not spending a better route to go? The successful people we have read and followed side with the second way more than the first.

Don’t let credit cards control your finances and your spending. It is called personal finance for a reason. YOU need to control your outcome!

2 Comments

  1. I have proven this a couple of times to myself that it is a lot of work to track the “deals.” Lowes gave free interest and we took the deal. We made 3 large purchases and ended up with 3 timelines to contend with: one for each purchase. It took me far more effort to read all the fine print than it was worth. I still missed a payment and triggered the interest on one of the purchases, so we just paid that loan off.

  2. Yes, it’s all about complexity for us. We haven’t used credit cards for years now, and it is so much easier to have full control of our money now. But of course, we’re doing our best to plan out each month’s budget to the dollar and spend every dollar we have intentionally.
    For years we did use one credit card on essential purchases like food because “free points”, but we accidentally were late one time and it nullified any advantage we had gained. That’s just not a good deal and it’s a more stressful way of dealing with money than I want.
    Thanks for the reminder that we aren’t crazy for preferring cash!

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