This is the question I’ve been asking myself for the past several weeks.
I finally paid off all of my credit cards once-and-for-all and I am extremely hesitant about getting back into any sort of credit card debt. Is there a better way to live that doesn’t involve paying for things with money I don’t (yet) have?
Using credit cards for everything: A slippery slope
The last time I paid off all of my credit cards, I decided I would use the credit card company for points. This seemed genius to me. I would use my credit card to pay for everything from McDonalds to rent and then pay off the credit card at the end of the month. This way, I would rack up points and use those points for gift cards and cash without going into any debt.
I did this for a few months and I have to admit it was pretty cool to log onto my credit card rewards’ website and see that I earned a $50 gift card to Macy’s just by spending money on my credit card that I normally spent from my checking account. What wasn’t cool? Paying off the credit card at the end of every month and having a balance in my checking account that was dangerously close to zero.
I was in a cycle that could get out of control quickly.
Unlike a checking account that doesn’t allow you to spend money you don’t have, it is easy to overspend on credit cards – especially rewards credit cards.
The downfall to credit card rewards
No matter how great a certain credit card’s rewards program is, the truth about all rewards cards is you have to spend a lot of money in order to earn any substantial points or cash back in a timely fashion. I found myself justifying a purchase or two with the thought that “I will get points for this”. For credit card companies, this sort of thinking increases their bottom line.
Consumer Reports recently released their findings that about 85 percent of U.S. households participate in at least one rewards program and people who have rewards cards often end up spending more money than those with a regular card.
As Mary Hunt points out in her book Debt-Proof Living:
“[Credit card companies] are not in business to give you free gasoline or free plane fares or a rebate check at the end of the year. They are in business to turn a huge profit, and if returning a minuscule portion to the consumer is the way to do it, that’s exactly what they’ll do.”
I realized that I was more likely to spend money if I had $100 left in my mental budget but several thousand dollars available for credit than if I had $100 left in my checking account. I found myself saying “Well if I spend more than I make this month, I’ll just pay the minimum payment and catch up next month.” Of course, next month comes with charges of its own and sooner than later, I’m over my head. Again.
A few months into my plan, I began charging a little more than I intended each month. With each swipe, I was making the #1 financial mistake (spending money I didn’t have) and thus going backwards from my goal of total financial independence. Too quickly, I discovered that if paying off my credit card in full at the end of any month meant overdrawing my checking account – or paying high interest fees to the credit card company in the form of minimum payments - than my idea of using my credit cards to earn points wasn’t so genius after all.
I’m giving up the “free money”…and the credit cards
So though I did earn some money from my “credit card points” experiment, I’ve decided to abandon credit cards in favor of paying cash – for everything. I may not have enough money to cover every single want, so some wants, I will have to do without until I can save up for them.
It makes me wince to think that I am missing out on “free money” from the credit card companies, but I temper that with the knowledge that I’m also missing out on potential late payments, interest charges and a never-ending cycle of debt.
That’s a reward in itself.