I used to receive a ton of credit card solicitations in the mail until I finally put my address on the do not spam list. Some of the offers really tried to suck people in, such as 6% cash back on groceries, or 3% on gas. Gas and groceries are the two unavoidable expenses for almost everyone and it is brilliant for credit card companies to target these two items.
Even though I have a small monthly grocery bill and only drive about 6,500 miles a year, I was tempted to sign up. The “spend more save more” mentality started taking hold! Then I read the fine print about the 29.99% APR, the limitation on how much I could get back, and the late penalty fee and decided not to sign up. The rewards program didn’t match my lifestyle.
If you are a family of five who spends $1,000+ a month on grocery and commutes 50 miles to work everyday, you probably will benefit the most from a 6% cash back on groceries/3% on gas rewards credit card vs. a city dweller like me with no dependents. You just have to look at the fine print and see what the COSTS are associated with the card.
THE BIGGEST DANGERS OF A REWARDS CREDIT CARD
* Wasting Money Due To Hoarding: A mother who normally spends $300 on groceries spends $500 on groceries to get 6% cash back ($12 on $200 more). Meanwhile, because they spent 65% more than normal, $100 worth of the food goes bad, netting them a $88 loss! Food is perishable folks, unless all you’re eating is frozen TV dinners and hashbrowns.
* Weight Gain: A father who normally spends $200 on groceries starts going goo goo eyed at all the sales in the store because he also has a rewards credit card. He’s now getting double savings on all sale items and therefore he must buy more! His spending goes from $200 to $300 so he can get an extra $6 cash back. Meanwhile, his weight ballons from 160 lbs to 185 lbs after a year because he’s eating so much! Oh, and after a year, he’s spent $1,128 more than he needed to ($1,2000-$78 rewards).
* More Financial Headaches: A young man who always uses public transportation or bikes/walks on the weekends decides to start driving more thanks to a 3% cash back on gas rewards card. As a result, his monthly gasoline bill goes from $150 to $350 because he’s now driving 1.5 hours north to Napa Valley every other weekend and no longer taking the bus into the city. He gets $6 in cash back for spending $200 more on gas. Meanwhile, he ends up spending $2,400 more a year on gas and another $1,000 for maintenance. Oh yeah, he also gets an extra $150 traffic ticket a year, completely wiping out his $74 cash back!
* Unhealthy Debt Increase: A lady who already has an proclivity to shop online gets an Amazon Rewards Card. Because all purchases on her card lead to a 3% credit towards any Amazon item, she increases her birthday and holiday gift buying from $50 on average per person to $100. She’s already $6,000 in credit card debt with only a couple thousand dollars in savings, but she just can’t pass up getting a whopping 3% back! Over a year, her credit card debt rises to $10,000 as she pays just $1,000 off a month. Meanwhile, the credit card company is making 20% off her debt, happily giving her 3% cash back forever!
* Seeing The World For More: Who doesn’t love airline rewards miles? A person spends so much money to get one free RT ticket for 35,000 miles only to have their airlines raise the cost of the ticket to 60,000 miles! All the money that could have been spent on more productive things. What’s worse, it might take so long to accumulate so many miles that they might expire before he can get there!
Related: How Much Should I Have Saved By Age?
YOU MUST GET OUT OF THE “SPEND MORE SAVE MORE MENTALITY”
Please folks, don’t get in the habit of justifying your spending because of a rewards program. You must spend within your means! Spending $100 you normally wouldn’t to get $3-$6 back is dumb. On the other hand, spending $100 that you normally would spend and getting $3-$6 back is fantastic! Know your spending habits and don’t let credit card rewards draw you in and change your habits.
Here’s a great post on how to control your spending and boost savings. If the amount of money you are saving each paycheck or each month doesn’t hurt a little, you are not saving enough! After 10+ years of diligent savings you will build your net worth greater than you can ever imagine.
* Looking for an awesome travel rewards credit card? Check out the Chase Sapphire Preferred® Card and other great rewards cards. I use my Chase credit card for all my business and travel spending to get points for more free travel, insurance in case my bags are lost or my flight is stuck, and more insurance for defective products I buy and want to return. Everybody should have a credit card for the free 30 day credit. Just make sure to pay off your credit card every month in full! Check out some of the benefits:
- Earn 50,000 bonus points when you spend $4,000 on purchases in the first 3 months from account opening. That’s a ~$650 value right there.
- Named a ‘Best Credit Card’ for Travel Rewards by MONEY Magazine.
- You get 2X points on travel and dining at restaurants & 1 point per dollar spent on all other purchases.
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After you link all your accounts, use their brand new Retirement Planning Calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Updated for 2017 and beyond.