3/25/2008

1% Back. Is This Attractive?

This is something that continues to baffle me. Why do people work themselves up into a froth over getting 1% back from a credit card? I'm not a fan of credit cards to begin with, but how is this such a selling point? Now I know that some cards 'sweeten' the deal by offering 2% or 3% at the grocery store, or 5% at the gas station, nail salons, and petting zoos, or whatever. This just isn't a temptation, and trust me, I love getting something for free. But this isn't free.

For one, you've already sold your soul to the credit card company. Proverbs 22:7 says the borrower is slave to the lender. There's no question as to what role you are filling here. Maybe you don't identify yourself as a Christian, but if you do, you may want to peruse Proverbs. There's some good stuff in there. Also, what is 1%, really? If you spent $100 at the grocery store, your 1% back is a whopping $1. One dollar. Approximately how long do you think it takes you to overspend by $1? At the grocery store? It takes no time at all. A $3 frozen pizza or a $4 frozen pizza? DONE. $5 frozen pizza? EEEk! How about $1000 at the electronics store? That would yield a kick-back of $10. Of the zillion ways to overspend at the electronics store, consider DVD movies, grossly overpriced cables, and extended service plans. That $10 didn't make it anywhere near the door. And by overspend, I don't mean necessarily spending money you don't have. Just spending more than you planned, or more than you needed to spend. That's what a reward does by nature. It encourages you to do more of what you just got rewarded for doing. In this case you were rewarded for spending money. Is that a behavior that you really need some encouragement on? "The more you spend, the more you earn". Earn!?! Don't even. You didn't earn anything.

No, the credit card companies and banks don't force anyone to use their products. Yes, it is possible to use credit cards responsibly and I've actually seen it done. But lenders don't make money off of responsible usage. Or not as much off of responsible usage - there is the ever-present transaction fee as well as the occasional annual fee. They make more money off of spending more and spending more often. Maybe thats why their commercials feature those behaviors to extremes. Maybe thats why their industry spends billions annually on these ad campaigns. Its no wonder that our society has bought into their lies of what "life takes" and what you should "never leave home without". If they have to spend so much to convince you to use their product, then doesn't that seem like a red flag? It works though. Year after year, I've watched the total amount owed on credit cards in America steadily climb from ~$600 billion to todays total of just shy of $1 trillion. What do you suppose the financing charge is on $1 trillion? Bet they're picking up beaucoup points and rewards!

So here's one to add to the "Full Disclosure" list: I've never had a credit card. Not as an account holder. Not as an authorized user. None. Ever. So I've never experienced the thrill of rewards card shopping nor the thrill of credit card debt first hand. Check out the guy in the picture above. He just made a phone call and got some point or something. He sure looks thrilled. Maybe I missed out. My wife had a few (now long gone and shredded), but never carried a balance in ~8 years as a card holder. Her main card of choice was a Discover card - rewards, cash back, you know the drill. During our married life, we used the rewards mostly for gifts - lobster-grams, fruit baskets... Really personal, I know. I'm sure our extended family felt the love. Since shredding the ol' Discover card, we've taken to making as many gifts as possible. Not only have our hand-crafts gone over well as gifts, but we've also done pretty well selling them as a side business. It's that difference between, "I got you something" and, "I get you and I got you a gift". But back to the rewards, there was a time when the majority of our spending for the month was on the card, thus 'earning' more kick-backs. But from the outset of going credit-free, we have yet to miss the kick-backs and rewards and crap.

And what if you do carry a balance? Right? So many scenarios and hypothetical assume that you pay the bill in full, every single month, forever. For the entire rewards argument to be true, you must first assume the best-case-scenario - zero balance, never late for any reason. No payroll mishaps, no direct-deposit miscues, no auto-bill-pay snafus, no network outages, no rogue reps in the billing department posting your check on the next day's business since they benefit from your misfortune. The entire tangled web must function correctly. And that doesn't even take you into account. On vacation, out-of-town on business, visiting the family in Hicksville (internet access = ZERO), blah, blah, blah blah, blah.... Any number of things could cause this most dreaded of situations to arise besides simply not having the money to pay the bill - by your own negligence or not. So then what? Even those who use credit cards will tell you that rewards card benefits pale in comparison to interest and late fees.

Risk > Reward.

So help me out here. Why? What is the draw? Do rewards draw you in like a moth to a light? Do you think you are winning because of your rewards/cash back/free hat? Do you carry or have you ever carried a balance?

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3 comments:

sara l said...

During my year in grad school I used a rewards card to charge (and immediately repay) my tuition. Between tuition, books, and living expense I earned enough rewards for a two plane tickets. I used one to go home for a holiday and my other half used the other to see his friend off before a long deployment. Because I have rules regarding how I use the card the it works well for us.

My mom started me off with a firm set of rules for responsible credit card usage. As an adult I never have anything on a card that I couldn't immediately pay off. When I was an undergrad I think I accidentally carried a balance once.

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SheGazelle said...

The ways that you mentioned- delays in check posting or just putting one's check in the shredder- these are the practices that Rewards loving card holders fail to factor in. I just read today on Literary License where a check and a letter were sent to a creditor- a final payment and a letter to close the account- and 3 weeks later the check "hasn't been received" but the letter has. Gimme a break. Credit card companies are crooks, bottom line. The only people getting rewards are them!

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