Credit cards can be a great tool for earning rewards and cash back if used properly. Unfortunately, according to NerdWallet.com, the average household that’s carrying credit card debt has a balance of $15,482.¹
In addition, if you do not pay off your entire credit card balance every single month, your rewards program is not worth it. If you do not or can not pay off your credit card balance every month, you should stop all use of credit cards. You are paying between 15-25% a month on that balance which totally negates any type of reward you would receive. The bottom line is, if you have credit card debt that you can’t pay off every month – cut those cards up! You are literally throwing a ton of money away every month with those high fees. If you are able to pay that entire balance off each month, stand by – I have some insights for you later in this article.
Cash is King!
If you struggle to stay on a budget and you constantly overpay each month on a single category – say groceries – your credit card may be the culprit. I challenge you to try an experiment this next month. If your grocery budget is $800 a month, go to the bank and withdraw $800 in cash. That $800 in cash is now all you are allowed to use on groceries next month. Try it for a month and let me know how those transactions feel. When you hand over $100 in 20 dollar bills at the register, it hurts. Paying with cash has a much different feel to it compared to paying with credit. I can swipe my credit card all day long and feel very little because I’ll deal with the bill at the end of the month. When I hand over cash, it hurts because I know it is a finite resource.
Cash has an incredible way of keeping you on budget. When you have 1 week left in the month and you only have $100, I will bet you pay attention to every purchase and look for deals and coupons. Cash forces you to be smarter with money because you can instantly see it leaving you. Credit cards separate us from that emotional tie to money that hurts when we buy something. What about debit cards? Debit cards are much better than credit but they also remove us from the pain of spending. Many debit cards also have overdraft protection which goes to a credit card in the event you over spend. I encourage you to try the cash option for a month and let me know how it changes your spending habits! When you can actively see that $800 going away, you know when it’s gone it’s gone!
So, if you can’t or don’t pay off the entire balance each month – stop using credit immediately. Switch to debit and cash so you stop the bleeding from debt. We need to swing the pendulum the other way which starts with the elimination of credit cards and further debt.
If you are one of the few who pay your entire balance off each month, congratulations!! You are not spending more than you make! While this is great, this is not exactly cause for celebration. Just because you spend less than you make doesn’t mean you are being financially responsible. If your $800 grocery budget turns into $1,000 a month, that just means you have the expendable income to move money from one place to another to adjust for your overspending. A budget is not a suggestion, it is a plan you employ each month to take control of your money.
Please do not let me diminish your current achievement of paying off your credit card every month. The majority of Americans can’t do this – it is a great accomplishment! I just want to reveal how much faster your financial goals could be achieved if you further curbed your credit use.
Credit and Overspending
Let’s use that grocery example. In the past, I would usually go over my grocery budget because when I wanted a late night ice cream snack, I could afford it. I don’t have debt or vehicle loans so I usually have a bit of left over cash at the end of the month that I put toward my house to pay it off faster. If I go over on my grocery budget, no big deal because I have the extra cash in reserve. Unfortunately, it is a big deal. If I used cash, I wouldn’t overspend on my grocery bill because I would know when my cash was gone, my spending would stop. Using credit takes the emotion out of my purchases which is why I typically overspend on food.
What does this have to do with credit card rewards? Well, if I overspend on my grocery bill by $200 a month, I am spending $200 more than I want to and only getting $4 back. If I used cash, I would be saving myself $196 each month I overspend by $200. Credit cards bank on you overspending which is what happens to me when I rely on credit to make everyday purchases solely for rewards.
If you make a budget each month and use credit cards for those purchases, and you do not overspend in any category – then I have no argument over using credit cards for rewards programs. Years ago, I would use the Costco cash back rewards card and get about $800 back a year in cash. It seemed like a big win in my book because I pay my card off each month. Free money right? Wrong. I overspent in at least some category each and every one of those months. Just because I had the cash to pay for my overspending doesn’t mean it was worth it. I guarantee you I overspent by more than $800 for the entire year which makes that $800 not look so grand. I would have saved over $800 by using cash instead.
I am not against using credit cards, I just want to make sure you fully understand the power of them before you use them. Reward programs are beneficial only if you do not overspend when you use credit cards. If you overspend or do not pay the entire bill off every month, then the rewards programs are just a gimmick. I can’t find the statistics on it but I bet only a single digit percentage of the population stays on budget and pays off their bill every month. I know myself and I certainly don’t fall in this category if I use a credit card. What about you, where do you fall?
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