Two Cents Tuesday - What's the deal with credit card points?

If you’re like most folks, you probably use credit cards. Maybe you’re working on paying them off, or maybe you’re like a lot of people and use them for points.

Getting rewarded for spending money you were going to use anyway? Sounds like a great thing, right? Just switch the card you pull out of your wallet and there you are. Points! As long as you pay off the cards at the end of the month, you don’t pay interest, and then you get all these magic points. Win-win, am I right?

Not so fast.

[Check out the video below to see what I think about credit card points - the good, the bad, the ugly]

Using a credit card for spending can have a dramatic and often unseen impact on our money behavior. That’s in part because credit cards don’t feel “real” the way using a debit card or cash does. Most folks consciously or subconsciously look at their bank balance to see how they’re doing. When you use a debit card, you see that number declining - when you use a credit card, you don’t. We keep a mental tally of “How OK I Am Doing” by that checking account number.

Ideally, you’ll be using a strong budget (like the type I teach in my workshops) and not relying on your bank account balance to make spending decisions, but we all are keeping an eye on that bank balance in the back of our minds.

I often hear folks saying things like “I just keep my credit card balance under $X,000 and then I know I’m OK”. How do they come up with this number? What does that include?

This is spending based on gut feelings and intuition. It’s not to say there’s not a place for that, but spending based on data and having all the information about what our money needs to do for us? Much stronger (leading to a lot more confidence and clarity). Credit card spending doesn’t feel real. It’s so easy to overdo it with credit cards.

What does that have to do with points? In short, the ‘doesn’t-feel-real’-ness of credit card spending tends to lead people to spend more than they otherwise would, negating any benefit you get from those points. That’s why, for most people, I recommend not using credit cards - even if you pay them off in full every month.

A little backstory. Do you know how credit card companies make money?

Interest and fees, duh. Right?

Yes and no. For sure, credit card companies make money off of charging interest for folks who don’t pay their cards in full, and by charging annual fees. Additionally, there’s another way they make money (a very, very significant amount of money) is off something called interchange.

Interchange is essentially money that credit card companies and processors charge merchants and vendors - from your Amazon’s and Wal-Marts to your little people like myself - to accept credit cards. Some of that money gets passed onto folks like yourself in the form of credit card points - but the majority of it goes into the bottom line for the credit card companies.

What about bonus points that I get for specific types of spending, like on gas stations, groceries, or restaurants? These are very carefully chosen by credit card companies in order to get you to develop a habit of using that card at that place. If you have a “grocery credit card” - that’s like gold to a credit card company. How much money do you spend at the grocery store every month? If you’re like most of my clients, it’s your first or second largest expense (including your mortgage). Even if you pay that off each month dutifully, the credit card company is only passing a portion of those fees onto you, and they’re betting that you won’t always be able to pay it off.

The billions of dollars in profit they rake in year after year tell us that they’re right.

The bottom line is: using credit cards can make you stop thinking about your spending, and when you stop thinking about your spending, you stop paying attention - and then you’ve got a much bigger problem on your hands, and you’re quite likely to overspend (often by a lot more than those points are worth!).

Let me know in the comments, do you use credit cards for points? Has this changed the way you think about them at all?