A certain financial expert (you know, the one with a popular radio show) hates credit cards. I hate them too. But he hates them so much, he says you shouldn’t have any. He says you’re foolish if you think you can make any money by exploiting credit-card bonus offers. He says the credit-card companies are so clever and so good at making money from credit cards that you haven’t got a chance. He says that he’s never met any millionaires who say they got rich from credit-card rewards. If you put it that way, it makes sense. But people do become wealthy by spending very carefully — all the better to achieve the goal of living below your means — and then carefully investing their savings. Still, this financial expert will tell you: No credit cards.
On average, he’s right. That’s good advice. If you don’t have a credit card, you will never be tempted to take on more debt than you can handle. You will never run the risk of being forced to pay the interest that turns you into a slave. If you’re an average person, if you’re not certain you can resist temptation, then take the advice as outlined above. Don’t get a credit card. Don’t fall for the banks’ tricks of offering you this bonus, or that reward, some cash back, miles, points, or whatever, if you think there’s any chance that the banks are going to play you for a fool, and use you to make money for them.
It’s obvious that credit-card companies would stop offering sign-up bonuses if they were losing money by doing so. The credit-card companies say, “we’ll give you this new credit card and if you spend $1,000 in three months we’ll give you $100.” They know that many people will be overwhelmed by the available credit and they will spend and spend and spend some more, charging everything on the card until the card is at its limit. Once that happens, these poor people will pay for everything they bought over and over again as interest charges and fees are added to balance. (Besides that, there’s also the established fact that people tend to spend more when they can charge a purchase on a credit card, as opposed to, say, having to lay down actual cash every time they want to buy something. You’ve got a credit card? Sure, you’re more likely to have another drink at the bar, order dessert with that restaurant meal, and get a new tie when you buy a shirt.)
But I think that while most people fall into the credit-card trap there are some that can play the credit-card game and win.
Here’s what I did recently.
I got the usual credit-card bonus offer. If I charged $1,500, I would get a $100 bonus, with 0% interest rate for the first 13 months. (Not the best, as these offers go, but I decided to take it anyway.) As soon as I got the card, I went online and paid $1,000 on my electric bill and $500 on my gas bill, in effect paying several months in advance. One of them included a small charge (less than $2) to use a credit card; there was no fee on the other.
I logged in on my new credit card’s website a couple days later and was pleased to see my account had already been credited $100. I bought $1,500’s worth of electricity and natural gas for $1,400. A discount of $100 or almost 7%. I’ll pay it off in monthly payments of roughly $100 over the next year, which will come out of the money that I already had budgeted for my utility bills. Because I’ll pay it off completely during the 0%-interest-rate period, I won’t pay any interest charges. As for credit-card induced spending: I don’t think that paying my utility bills with a credit card is going to cause me to use more electricity and gas than I otherwise would.
That’s all there is to it. I’ll never use the card again and will eventually cancel it. Applying for the card, paying the utility bills, and then paying off the card will take me maybe an hour. That’s $98 (taking into account the fee to use the credit card) for an hour’s work. That’s good enough for me.
It does, however, take willpower. It takes self control. My new credit card came with a $10,000 credit limit. After the introductory 0% interest rate, the regular interest rate will be the usual 20% or higher. If I went crazy and used the card to pay for meals at all of the best restaurants in town, or if I went on a super shopping spree, or took a luxury vacation, I could easily use the card to reduce my net worth by $10,000 and spend most of the rest of my life paying it off, being one of the many borrowers who are slaves to the lender. I won’t do those things. But I know, and the banks know, that many others will.
