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!
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.
WEALTH BUILDING RECOMMENDATIONS
* Check Your Credit Score: Take a moment to check your free TransUnion credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance! The average credit score for rejected mortgage borrowers has risen to 729 due to more stringent lending requirements. Do you know what your score is? If you don’t want the credit monitoring service, simply cancel before the grace period is up.
Track Your Net Worth For Free: In order to grow your net worth, it’s important to thoroughly understand the details of your net worth. People are spending more than they think and saving less than they think. False beliefs add up to deleterious consequences over time as people wonder where all their money went. As soon as I started tracking my net worth through an Excel document 12 years ago, I was able to optimize my money for the greatest returns. I then signed up for Personal Capital’s free financial dashboard in 2012 that tracks your net worth for you once you link all our accounts, analyzes your investment portfolio(s) for excessive fees, provides monthly cash flow analysis, and helps you forecast your retirement. There’s no better free money management tool online today.
Updated for 2015 and beyond.