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Dollars and Sense - May 2024

Credit Cards - Not Always Rewarding

Credit cards are becoming the go-to payment method of every generation, not just the younger crowd. You may even notice that the younger you are, the more unlikely it is that you will even carry a card at all as they are being replaced by more and more apps and online payment methods! The use of real cash is much less common nowadays especially with many not wanting to risk catching germs on cash throughout Covid (not to mention that it was difficult getting to a bank with many of the branches closed during this time). This is not the case everywhere, but in the US, using cash is still sure to surprise whomever you are paying.

Pros

There are many benefits that come along with credit card usage, but like most good things, there can be negative ramifications as well.

The ease of paying the exact amount of every bill without carrying around cash and change is certainly high on the list of benefits. In addition, the shift to online purchasing has made the credit card almost a requirement. Other benefits include the ability to build credit for the future, the financing of large purchases when done correctly, and receiving buyer’s protection if a seller is fraudulent.

Most credit cards also tend to offer rewards for your spending. The details of this are beyond the scope of this article, but suffice it to say that like everything else, there is a balance that is necessary to keep the bad outcomes from overpowering the good. There is a lot to take into account as you gather miles or points for future use. Bonus offers and introductory deals can often lead you to overlook costs and restrictions. 

Cons

One of the most worrisome facts about credit cards comes from the studies that show people spend more when they are paying with a credit card than when they pay with cash. This applies not just to the people who carry a balance from month to month, but to most consumers. To test this theory, I suggest thinking about the last time you used your credit card. When was it? Where was it? How much was the charge for? If you can answer all of those correctly, you are in the minority. The simplicity of swiping the card has become such a habit, we often forget to pay attention to the cost. This is very common at places where there are few choices, like the grocery store or gas station. I’d also recommend using cash only for a week’s worth of expenses. Spending cash feels more real than swiping a credit card. When you see your pile of money literally disappearing, you will get a better feel for your real spending.

There are additional risks to using credit cards. In August 2021, a small company called Affirm, which burst onto the scene when it offered the “buy-now, pay-later” plan for the Peloton exercise bike, announced a partnership with Amazon that would allow Amazon purchases over $50 to be set up on the system to pay it off over time. The buy-now, pay-later plan seems like a great program, but it is promoting the mindset of buying something that you cannot currently afford.

A few other risks worth highlighting include getting sucked into the credit card with a zero percent interest rate. This works until you cannot pay off your balance and the special zero percent expires. The interest rate will often revert to over twenty percent, and when you pay that rate, it is difficult to pay off your balance. You end up paying interest payments only and the debt is usually there to stay.

Other dangers in using credit cards include possible credit card fraud, the possibility of damaging your credit, extra fees to pay for having the card, and even late fees if you miss your payment.

Credit cards can be replaced by a debit card or even by using your bank information for online purchases. Some of the same danger exists, but your chances of overspending go down when you are limited by what is in your bank account.

There is actually new news in the world of credit cards.  It is thought, but not known yet, how this will affect things like cash back and rewards cards.  In early 2024, the Consumer Financial Protection Bureau finalized a rule that capped late fees at $8 for the first violation, down from the typical $32.  Then, also this year, a major case between merchants and visa and mastercard was settled for $30 billion.  This was with the agreement to level out the fees charged for different transactions - and cap the fees too.

The key takeaway from this news is that the banks and card issuers are really good at collecting revenue from you the consumer.  They collect millions in fees and that is one of the things that powers and feeds the rewards programs.  There are other ways that the companies will get their revenue and I am confident that it will come from everyday card users.  This is just another reason to pay attention to your card usage and those fees and interest rates.

There is more to come as high interest rates have gotten the attention of lawmakers.  All of this still goes back to responsible use of the credit cards.  Much like most things, there can be benefits from credit card usage, but too much and irresponsible use can be dangerous.  Be sure to take that into account with your plans.

Remember, credit cards are not a game. Some people may play the system for a “cheap thrill” of collecting bonuses and rewards. This can serve you well if you are extra careful, but much like the games in Las Vegas, the game is designed for the “house to always win.” It is likely that credit cards and electronic money app usage will only increase in the future, so continue to be vigilant and look out for your financial well-being.


1https://advisors.vanguard.com/insights/article/putting-a-value-on-your-value-quantifying-advisors-alpha

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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