How credit card companies win with YOUR money.
Even though everyone you know is (not really) paying their credit card balance off each month, America is in the ballpark of $1 Trillion in debt to their plastic masters. In fact, according to LendingTree, 56% of American credit cards carried a balance as of the third quarter of 2022. So why would millions of hard-working people choose to pay an average APR of 24.06 percent? Many say the “rewards” such as cash back, airline miles, and hotel points are too good to pass up. However, banks and businesses who are “helping” these customers are making billions on interest and through excess spending. Here’s a deep dive into how the credit card rewards game works, and why most card members lose when they play.
Hook #1-Cash Back
How they hooked you: Congratulations! You have been pre-approved for a credit card with a low annual interest rate of 19.99%. You can earn up to 5% cash back on select purchases!
Truth be told: Many cash back rewards are as low as 1%, and some companies are already kicking your butt even if the rates are higher because YOU ARE BUYING THEIR STUFF! But okay, let’s be reasonable and say you have a magical cash back card that gets you 5% on all purchases at the “generous” sub-20% rate above. If you are a loyal customer who spends $10,000, you will get a whopping $500 in exchange for mortgaging your future to buy “essential items” such as the latest 7K 80-inch flatscreen tv that cooks your wings. Many customers use a credit card payoff system called “Interest + 1% of Balance” to make their monthly payments (because they lie and they can’t really afford to pay off the stuff right away, but they NEEDED it to watch the big game!). Per calculator.net, here’s how long it would take on that payment structure to pay off the $10,000. I hope the $500 cash back was worth it.
I know, I know…some people are going to push into that credit card payment. Here’s what it would look like if you paid off the same $10,000 balance at the rate of $1,000 per month. The interest is still more than double the cash back you “earned”. Holy moly.
Hook #2-Airline Miles
How they hooked you: With the new High-Flyers Credit Card, you can earn two miles for every dollar spent, with elite club access at airports worldwide!
Truth be told: While reading a piece by NerdWallet, I learned that the cost of airline miles can range between 0.8 to 2 cents charged on the card per mile earned, with the average being 1.2 cents. Even though word is getting out that rewards are dwindling and only a fraction of airline miles are actually redeemed, I’ll be nice and pretend that everyone is getting the high-end deal, which would equate to spending one dollar to earn 50 airline miles. How many miles it takes to “earn” a free flight can greatly vary. Per ValuePenguin, a one-way flight from New York to Los Angeles can cost anywhere from 8,000 to 57,000 airline miles. I’ll be generous once again and say that everyone who tried found an amazing peak-season rate of 20,000 miles for these one-way flights when planning a trip for their family of four. Assuming they continued to earn the high-end milage of 50 miles per two cents, it would cost $400 in credit card spending for a one-way ticket. In other words, $3,200 of high-interest debt was needed for this “free” vacation. I hope the cardholders stopped through the elite air miles club to get their free cocktail to drown those debt sorrows. And we haven’t even gotten to the hotel yet. Good news, hotel companies can “hook you up” with their credit card rewards too!
Hook #3-Hotel Points
How they hooked you: Platinum Elite VIP Members get 50,000 bonus points by spending just $1,000 on your platinum card within the first three months of membership. Platinum Elite VIP Members also get 20% off food and drink purchases at all Platinum resorts!
Truth be told: Seriously, this is getting insulting. But people are falling for this every day. Let’s say that a family of four wants to go on vacation and the parents who are choosing to yolo instead of saving for college want to use their 50,000 "bonus" points for a four-night hotel stay.
So, yes, it is possible with the 50,000 points to have enough points to stay at a Tier 1 or Tier 2 (only during off-season!) hotel for the four nights without having to add “real money” to pay for the stay. I hope the $1,000 in credit card debt was worth staying at the Casa La Cucaracha. Many families are only able to go on vacation during peak times when their children are off school (like Winter Break or Summer Vacation), and we can see in the example above that the choices would be sub-par accommodations or add on to the credit card debt. Good news, standard dollar-to-points amount is $1 spent to earn 10 points, so another $5,000 in the hole and the family could perhaps “upgrade” to a higher tier! Pacaso reminded me there is also the pesky need to eat while on vacation, and the daily average for food and drinks per family member is $67 per person, per day, which will increase the cost of the trip about $1,000 more. Ah, a built-in excuse to take advantage of that food and beverage “discount” and pump even more money back into the hotel!
Conclusion
Credit card companies and their airline/hotel partners have used slick advertising and reward programs to entice their customers to go into almost one trillion dollars’ worth of high-interest debt. By playing the game to try to beat the system and earn cash back, miles, points, and other “prizes”, cardholders are spending an average of $57 per credit card transaction compared to $22 when they use cash, according to research by upgradedpoints.com. The next time you want to go on vacation, try this crazy idea: Live on less than you make for an amount of time that allows you to save enough money to fly and stay where you want, for less cost than you would by accumulating miles/points, and paying zero interest in the process!
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