Credit Cards Points

November 14, 2022
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     If you could take a trip to anywhere in the world, where would you go?  Is it a domestic trip?  International?  Why haven’t you done it yet?  Could it be the cost, or time, or difficulty to get there?  If Covid has taught us anything, it’s that life is short, and we need to check items off of our bucket list, but travel is expensive these days.  From flights to hotels, it just seems to get more and more challenging to get out of town to a far-away location.  I’m turning 40 in December (I know, it’s hard to believe) and my wife and I are discussing a ski trip to celebrate.  But have you checked the prices of plane tickets lately?  I have to buy 3 of them (Thank goodness my daughter still flies for free).  I also have to find a place to stay on this trip and potentially rent a car.  Now things are starting to get pricey!  Fortunately, I am a big fan of playing the credit card points game and am going to be able to take this trip at a fraction of the costs because I’ve been building points up for years and have learned how to spot great deals. 

     Let’s start with how credit cards and points work.  It’s quite simple, when you make a transaction, you get a certain number of points per dollar spent based on the card and vendor.  Some cards give higher point values for different categories than others.  For example, my wife and I use the Blue Cash Preferred® Card from American Express.  We like it because we get 6% cash back on groceries up to $6,000 annually (I then get 1% after that).  The card does have an annual fee of $95 but, when I spend $6,000, and I get $360 back in cash, it seems like pretty good arbitrage to me!  

     Often, cards have introductory offers that are EXTREMELY attractive.  The Chase Sapphire Preferred® Card offers 60,000 bonus points if you spend $4,000 within 3 months of opening the card.  That card also comes with an annual fee of $95, but you can open the card, pay $95, spend $4,000 and get 60,000 points.  Those points can be redeemed in cash at a rate of 1% which is $600.  So, you pay $95, and get $600.  Great! 

     Getting back to my trip, I have an airline card where if I buy 1 ticket at regular price, I can get a companion ticket for the cost of the taxes.  I pay $150/year for this card, but it is a rare year that my wife and I don’t fly together domestically and that tradeoff is well worth it.  That feature just knocked off 1/3 of the costs for my flight.  The 3rd ticket, I will be redeeming points for which knocks off 2/3 of the cost.  This helps me out tremendously!  Especially as my family grows over time, having these discounts is a lifesaver. 

     So, how do the credit card companies make money if they are giving away all of these perks.  Well, it’s quite simple, they get the annual fee (Not all cards have the annual fee and it’s often not worth it in some cases so do some research before deciding), and they make a fee on every single transaction that you ever make, AND if you are late on paying off your card, they charge exorbitant interest (most of the time) which can be devastating to your finances.  For example, if I open up a new credit card which is $95/year and spend $1,000/month and am never late in paying off the balance.  If the credit card company charges the merchants I buy from 1% on each transaction, at the end of the year, they have revenue of $215.  I know what you are thinking, that is nothing compared to some of the benefits I described above.  Correct, but lots of cards don’t have ANY rewards at all and they still collect that 1%-3% merchant fee on every transaction.  Some people are late and pay hundreds or thousands of dollars each month in interest charges and they make money that way.     

     Don’t feel bad for these credit card companies, they are doing just fine.  In 2021, Visa’s revenue was $24.1 Billion.  American Express was $46.29 Billion.  They are surviving.  

     So, why am I writing this?  I always try to think long term with money as that is often the best way to remain sane.  If I can average 3%-5% (Let’s say the average is 4%) cash back/points earned on my credit card purchases, long term if I spend $40,000/year on credit cards, at a 4% cash back/point rate, over 30 years I will receive $48,000 in benefits.  Not bad!  But wait, there’s more.  Often you can redeem points at a better value than 1%.  Sometimes during slow travel seasons, you can redeem at almost double that rate.  My wife and I once flew round-trip Business Class to Rome, Italy for a total of 220,000 points.  At a 1% redemption rate, that would have been $1,100/ticket.  As of my writing this, the cost of purchasing a comparable ticket would be $13,618.14.  For the same dates and approximately the same flights when we flew.  That is a discount of over $11,000.  

     Everything listed above is a benefit of using cards.  What are the negatives?  The name says it all.  CREDIT card.  Everything you buy using a credit card is on credit with a promise from you to pay it back.  You can easily get into trouble and fall behind because you borrowed money and then it is due down the road.  If you start running behind on payments, it’s easy to stay in trouble and tough to get caught up.  Then the interest you pay wipes out any positive benefit of owning the card.  This could cost you a lot of money and also hurt your credit.  We typically recommend never using more than 30% of the available credit on a card and paying off the statement balance in FULL by the due date.  If you have a $10,000 limit, never use more than $3,000 of the credit.  The 30% rule serves 2 purposes, it keeps the credit agencies from dinging your credit because you appear more trustworthy AND it keeps you from getting in trouble.    

     Also, it’s VERY easy to lose track of how much is being spent on a credit card and you can over-spend where with cash and debit cards, it’s impossible to overspend because you can’t spend more than you have.  I know myself well enough that I can get excited about something I want and quickly lose sight of what I’m doing, so, that is why I use credit cards for essentials like groceries, utilities, bills, etc., and use cash for everything else (There are a few exceptions here such as flights, hotels, and other big-ticket items).  Using cash for my discretionary purchases keeps me on track while using the cards for essentials helps me with points. 

     Just like almost everything in life, the key is to be disciplined and have some self-awareness.  You know yourself better than I do and if you know you won’t be able to keep your spending under control with a credit card, don’t buy one.  If you are cerebral and know that you will remain in control, take advantages of points.  Continue to live beneath your means and use cards to provide a little extra benefit to your life because getting off the plane in Rome after having a pretty good meal, champagne, Woodford reserve, and then laying down for a few hours, makes the travel a lot easier! 

 

Rory Hartmann CFP®

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