I have a confession to make today – I have serious beef with many personal finance gurus. I totally disagree with the following advice many of them give: use cash, do not use credit cards. Today I will explain why I believe using rewards credit cards make sense.
Don’t get me wrong, I understand why these personal finance gurus advise using cash for expenses and not credit cards. Because many people aren’t responsible with their credit cards. They get on crazy spending sprees and can’t pay their balance in full at end of the month.
A good example? I recently received a credit card statement around $4,500 in the mail (this card only sends paper statement, talk about keeping up with technology). Somewhere on the statement it says “if you only pay your minimum payment due each month ($44 in this case), the estimated time for repayment in full of your new balance is 26 years and 4 months.
Can you imagine paying credit card debt for 26+ years? Holy cow!
What’s crazier is that many credit card statements do not have such disclaimer about estimated time for repayment, SO some people get tricked thinking they only need to pay the minimum payment.
To make matter worse, some of these people keep buying things using their credit cards despite only paying the minimum payment each month.
It’s like a debt snowball rolling down a steep hill. The debt snowball gets bigger, Bigger and BIGGER, until it eats your ALIVE!
No wonder people get into serious credit card debt!!!
Why rewards credit cards make sense
If you are someone who is responsible with your credit card usage and follow the best financial advice that I have received, it makes absolutely no sense not to use credit cards for every day expenses.
Because you are leaving money on the table by not using credit cards. To be more specific, you are leaving money on the table by not using credit cards that give rewards.
If you pay your balance in full at end of each month, there’s no reason why you shouldn’t use rewards credit cards to earn passive income.
Sorry, I also don’t buy the notion that when you use credit cards for expenses you end up spending more money.
Maybe if you don’t have a budget system, but when you have a budget system that you follow meticulously, you won’t over spend.
Our primary credit card is Capital One Aspire Travel Master Card, which gives 2% travel reward miles for every dollar spend. Since gotten this card about 3.5 years ago, we have redeemed over $4,000 in reward miles. Yes that does mean we have spent a lot of money on this credit card but some of the expenses were from my work travel expenses.
Another credit card that we use is the Chase Marriott Visa, which gives 5 Marriott points per every dollar spent at over 3,500 participating Marriott locations (and 2 Marriott points at restaurants and 1 Marriott point for other expenses). To maximize the points, I only use this credit card when I’m staying at a Marriott hotel, typically for a business trip. Thanks to using this card, we managed to accumulate enough points to stay 5 nights in Osaka Marriott Miyako Hotel completely free during our 2 week travel in Japan last September. The hotel room cost almost $400 Canadian per night. So we essentially earned $2,000 in passive income by using this credit card.
In total, that’s over $6,000 in passive income that we wouldn’t been able to earn if we didn’t use rewards credit cards for every day expenses. If you have been reading this blog for a while, you know I’m all about having my money working hard for me so I don’t have to. That’s why I think it makes the perfect sense to use rewards credit cards.
So we will continue using rewards credit cards whenever we can. This is our way to earn more passive income and have our money working hard for us. 🙂
Now I have not tried credit card churning yet but I have looked into this strategy a bit more lately. I don’t ever plan to become a full time credit card churner but will definitely try to get as much “passive income” as possible.
Dear readers, what’s your view on using credit cards and rewards credit cards? Are you with me or with the personal finance gurus?
66 thoughts on “My beef with personal finance gurus”
I prefer to use cash. It limits me from buying things. Credit cards are bad for a lot of people.
A lot of people just run up their credit cards then pay the minimum for those it is good advise
For those who can pay it off each month it isn’t good advise. I don’t have the best rewards card but my credit union just sent me an upgrade 3 dollars for every 1 on gas 2 dollars on restraunts I think. I could have those reversed then a special online thing where you can get from like 2 -8 rewards ordering from like lowes through their member mall. Of course it varies from time to time.
Since I finally payed it off again I’ve kept buying to a minimum so that I can buy more stocks and save more in my account
Yes if you pay it off each month, you should try to take advantage of the credit card rewards. 🙂
I love the article but I have the opposite opinion for credit card rewards.
For the VAST majority of people, it is a terrible idea. Trust me, the smart people over at visa don’t just give out free money. Some can do it with a budget but I would say 99% get trapped. There are way better rewards that don’t hinge on a 20% interest rate.
Leverage off a HELOC or margin with much less risk and a higher reward.
The net worth of American families $81,400 in 2013. That’s some scary stuff.
Yes for vast majority of people credit card can be a terrible idea. That’s why personal finance gurus say don’t use credit cards to these people. But I think the gurus should have a statement along the line like “but if you can manage your credit card balance and always pay in full, take advantage of credit card rewards.”
I don’t want to suggest that an alternate universe where credit cards did not exist to such an extend would be a better situation, but its seems a little convoluted to be exhilarated at a situation where the retailer as a course of business marks up things by 2%, on which the bank network and credit card company claims half and the other half is returned to you as a “reward.”
That’s an interesting way to think about these “rewards.” I definitely have seen some vendors giving a small discount if you use cash instead of credit/debit cards.
When you have a population that can’t control spending the boring gurus will hit more of the masses to say “pay off debt and don’t use CCs.” For people who can control their spending using CCs with reward perks is a no-brainer! The Wife and I use the gold amex for points to travel with. We haven’t paid in full for a flight in a LONG time.
That’s true, the gurus just want to hit the masses.
You know my wife and I were just having this debate…for me, I can’t use a credit card. I have to have cash or a debit, it’s just something about the instantaneous hit that affects me psychologically. My wife on the other hand is disciplined and can use a credit card responsibly…so she does. I think that is why we call it personal finance…each person must find what formula equates success best for them. Some use credit and some do not:)
That’s great that you have realized that you need to use cash or a debit card. Totally true, it’s all about your personality and personal finance is… personal!
Creditcards make sense if you make good use of them like you do. But many people just ring everything on their card and drown in the bills latter on.
Definitely very true that many people just ring everything on their cards and get drown in the bills. If they can’t pay off the balance in full each month, they should definitely follow these gurus’ advice and staying with cash.
YES! I make an extra $500 – $750 per year for spending money on things that I would have spent on anyway. I have 5 credit cards right now to maximize my rewards potential and I am eyeing a few more to make sure that I take advantage of everything that I possibly can. Great post!
That’s good free money by simply using rewards cards. I’m not close to your level of maximizing my rewards potential. If anything I tend to cancel credit cards that I don’t use anymore before applying for another one.
It was interesting reading this post from you Tawcan. As I brainstorm ideas for future posts, so many that come to mind are actually the ways I differ from traditional personal finance thinking. It’s almost like I’m getting ready to make my blog a contrarian personal finance blog.
So much of the traditional advice from the “gurus” seems to be focused on the simple, safest ways to approach personal finance, which may be good for some. However, if you’re really ready to investment time and energy into you’re financial future, there are many better ways to approach things. The key is being responsible when you take the “riskier” roads, like using credit cards. If you don’t trust yourself to pay enough attention to your credit card usage, maybe cash is best, but if you do, they can offer immense benefit.
I’ll be writing a post about how I used 0% credit cards to pay for my MBA soon 🙂
That’s neat that you used 0% credit cards to pay for your MBA. I have never taken advantage of the 0% credit offer as I pay off the balance full at end of each month.
Wow, 5 free nights in Osaka Marriott Hotel, that’s impressive. I have been to Osaka Marriot but just to have an afternoon tea.
I completely agree on the smart use of credit cards. I have BOA Travel Rewards which I use for almost all our expenses and earn enough points to pay for one or two free nights in a good hotel. The nice thing about this card is that there is no annual fee or foreign exchange fee.
We got lucky that way. It was a fancy hotel for sure. 🙂
That’s really awesome your card doesn’t have annual fee or foreign exchange fee. Great for traveling expenses.
I personally use rewards credit cards and hack our way to some cheap travel.
However, I think the hard part to analyze is whether frugal people unknowingly increase their spending in order to get the sign up bonus reward (50,000 miles if you spend $5,000 in the first three months, or what have you). Might these otherwise thrifty people spend $3,500?
I ran across some interesting research a while back. The gist was that responsible credit users do seem to spend more when offered a credit card reward, while those who carried a balance on their credit card weren’t motivated to spend more.
Very true about the required spending for getting sign up bonus reward. I’ve always done it so I apply the card(s) before I know I have a big bill coming up (i.e. trip, car insurance, house insurance, etc).
I think you and many of the comments laid it out well: it’s free money as long as it’s not influencing your purchasing decisions. I had a recent post on this as well. In addition to rewards, credit cards offer more protection and make it much easier to track spending. Some offer other perks like free travel protection, purchase protection or free rental car insurance!
I’ve never needed to use the credit card protections but you bring up a good point. Some of the perks are great like rental car insurance, trip cancelation insurance, and lost baggage.
Just to play a little devil advocate I recommend to apply some Munger technique and wonder, who profits? Apparently the credit card users. The get things for free. But why are the credit companies so generous? Let’s discard their love for the client and look in the self-interest area: They do it to get more clients and more business. It’s a good point. But whatever reward programs they do they are not going to lose money on them. They have to keep theirs shareholders happy. So it some company it’s paying $2000 in rewards (more likely $1200 as they buy in bulk and get some discount for themselves) it means that someone it’s paying $1500 or more to keep the program profitable. But who is paying?
In this game there are three players. Credit card companies and banks give their payment service, merchants their services or goods, and the card users are the only ones to put some money on the table. Guess who is the patsy in this game.
Someone profits and the rewards “money” need to come from someone. That’s very true, hence for many stores setting a minimum amount to use debit/credit cards.
I’m with you on the credits and yes, there should be some clarification. I think the gurus scare some responsible younger people away from the cards. I’ve seen this with a family member in his 30s – when he went to buy a used car, couldn’t secure financing due to his total lack of credit.
We’ve been using rewards cards for years and, though I’ve never figured up the exact amount, I’m guessing we’ve collected between $6000-$8000 worth of cash back or travel rewards over the years. That’s nothing to sneeze at.
I totally think that many responsible younger folks get scared from using credit cards because statements from personal finance gurus. You need to build your credit score for things like car loan and mortgage later in life. You might as well learn how to use credit card responsibly so you can get good credit score.
I definitely had to have an evolution on credit cards. I had credit card debt back in the day, so I definitely needed a couple of years of only using debit cards and cash to reset my spending. But since then, I’ve been all about the rewards cards (and paying off the balance in full every month, of course). I travel tons for work, so get LOADS of points on my Chase Marriott Visa and Chase United Visa (up to almost a million on both, mostly thanks to work travel), and Mr. ONL has a similar story. So yeah, we’re total fans. All those points are going to bankroll a pretty huge portion of our travel in retirement very soon! 🙂
Hi Our Next Life,
That’s an interesting perspective coming from someone who used to have credit card debt and needed a couple of years to reset your spending. That’s totally awesome that you’ve learned your lessons and now are responsible with your credit cards. Wow a million points on both? That’s crazy. You can totally use those points once you guys are FI.
The key sentence from your article that drives the final decision and my answer to your question is that it is a good idea to use credit cards for points IF YOU ARE RESPONSIBLE. For you, me, Lanny, and all the other commentators, we are pretty in tune with our finances and understand how to use credit cards responsibly. For those who don’t understand it, an all cash diet may be their best bet to saving and shoring things up and if that is so, it is well worth giving up the 2% of rewards. I am all about exploiting the largest cash back rewards and have a sticky note on my phone to remind me every where I go which credit card is the most advantageous.
Thanks for the great article!
You absolutely need to be responsible to use a credit card but that’s true for many things in life as well. When you’re not responsible in your life you get into troubles.
I’m definitely with you on this, using credit cards to our advantage is a smart move. I very rarely use cash, it’s inconvenient.
However, I suspect we could be the 10% taking advantage of the rewards to their fullest, because the other 90% pays late fees or doesn’t pay their card in full each month 🙁
Very true that we’re probably the 10% taking advantage of the rewards to their fullest. There gotta be someone paying for these benefits right?
I agree with where you’re coming from. For nearly everyone reading your blog though, we’ve already made the financial transition. I think it’s similar to alcohol though in the analogy I’m going to use. We can all handle a drink or 2 (our finances/credit cards) but lots of people don’t know that alcohol (debt) is really bad and don’t have the control. So it’s better for them to stay alcohol (credit card) free rather than risk playing with fire. It’s the alcoholics that the finance gurus are trying to reach. AA meetings are not run for people like us 🙂
If we lived in the USA, I’m sure we’d be an advocate for credit cards too! Australia limits the amount of fee a credit card company can charge to the amount the transaction costs to process – which really limits how much revenue, therefore points, can be generated. So you won’t find all those fantastic cards here. 🙁
Love your analogy with alcohol Tristan. We are very lucky to have so many credit card options here in North America.
I agree wholeheartedly, reward cards are great for those of us who are responsible, although I take it to the extreme. My wife and I have been churning credit cards for five years and have basically earned over 3.5 million points. We’ve used some of those to pay for about 20 round trip flights and dozens of hotel nights. Ah, America! And to think, up until five years ago I never had a credit card. And now I’ve burned through about 50 of them!
This is one of many topics that drive me crazy. I don’t think the gurus actually believe what they’re preaching. Sadly, many people cannot handle the responsibility that comes with credit cards. They max out their balances and spend their cash on more things that they don’t need. I think this is why this message keeps getting delivered.
I love credit cards and I try to pay for everything with them. In my past life, I used to buy cars with my credit cards and pay them off the next month. Rewards programs are really good. I’ve taken free trips, and funded entire holiday seasons just with the gift cards I can buy with credit card points.
So while I disagree with the gurus, I understand why they are taking this stance.
When we recently purchased our car I negotiated with the dealership so we paid an extra $5,000 with our credit card. At 2%, that’s an extra $100 in our pocket. The dealership wasn’t happy but decided to do it so keep our business.
Brother in law booked first class tickets to Europe this year using reward cards, so yes it does work
That’s totally awesome!
You’re dealing with completely different subsets of people. The personal finance gurus are speaking to the ones that have little to no control over their finances which is why the best thing for them is to cut up their credit cards. It’s a shock to their system and forces them into better behavior. They have a track record of poor financial management so they have to take a drastic step.
For those that are responsible then yes by all means use rewards credit cards. 1% or 2% might not be much but it’s honestly better than any savings account right now.
Very true but I wish the gurus make some clarification about their “cash only” statement. When you’re just starting out and have no good grasp of your money then yes using cash makes sense. But when you have graduated to the next level, I think using rewards credit cards make a lot of sense.
I completely agree with you about credit card usage. As long as you’re responsible, why leave benefits on the table? I pay nearly all my expenses with a rewards credit card and pay it off in full each month. I still spend within my carefully planned budget. Besides the rewards, there are other benefits of credit cards such as being easier to track than cash, holding on to your money longer (for a bit of interest), purchase protection, and in case of theft, your potential losses are minimal. I think one of the important things is to make sure you don’t have recurring charges on your card that you don’t want, as that’s a sure way to sink your budget. You always have to be aware of what’s being charged to your card and make sure it fits into your financial plan.
You just mentioned all the other benefits of using credit cards.Good point about making sure you don’t have recurring charges that you don’t want. That’s why it’s important to go through your statement each month and review your expenses.
I’m with you. Reward cards are the best. 🙂 Credit cards are one of the most secure payment methods and you can get reimbursed if the merchant screws up. The “gurus” Band-Aid solution doesn’t work long term because it fails to address the root of the problem, which is a lack of financial awareness or discipline.
Security is another reason why you should use credit cards for many purchases, especially online purchases. 🙂
Haha nice post, Tawcan. I agree with the guidelines — most personal financial bloggers keep harking about not using credit cards but I just dont see it. There are a lot of benefits that can be reaped instead of sticking to cash. yes, there are some ppl who cant help but spend on borrowed money and do not understand how interest rate works — but for people like that need to control their urges.
There are definitely lots benefits using credit cards that give cash/rewards, I just wish these gurus that keep harking about not using credit cards can clarify their statements a bit.
That reminds me of a time when I went out with my team for drinks. We ordered at the bar, and when mine came, I just paid cash because I was only having one and didn’t want to deal with closing out a tab later on.I immediately heard 2 of them say, “Cash?! Who uses cash?! I use rewards cards, and get rewarded for every purchase!”
I do use rewards cards for all my purchases, and even switched from my REI card to Chase freedom, and recently switched to Amazon. Yep, it’s still a “Chase” card, but it gave me better returns on more things 2-3% cash back, and 5% on Amazon purchases, so why not? 🙂
I agree that if you can’t manage your spending, then using cash is a good trick because when you’re out of cash, you’re out of cash. However, when I tried that trick back in my horrible financial days, I’d run out of cash and then pull out the card. (palm slap to forehead)
Haha, I think you missed the advise slightly. If you’re using cash, you’re not supposed to have a credit card or carry a credit card. 😉
Don’t get me wrong, I do see the case for using cash in some scenarios but if you can earn extra money while controlling your expenses, why not?
Agree 100%, and for me it’s either cash back or miles/pts for travel. Within each pay period, I use the CC to spend what’s needed, pay off the bill, save and invest the surplus, collect the rewards earned. Rinse and repeat…
Exactly what we do as well, rinse and repeat. So simple. 🙂
I prefer to use my cashback card for every single purchase that I am able to use it for! There is simply no disadvantage to using it over cash, or debit. I earn a small cashback on every purchase, I get 21days to pay it off, perfect if I am waiting on a paycheque to come in, or better yet rather have my extra cash sitting in a savings account getting me interest for those extra 21days.
Regularly using and paying off your credit card helps to build my credit rating. And I simply do not like carrying around cash, getting small change back and having to withdraw/deposit physical cash, I even work in a bank and I find it inconvenient to have to do so!
Like you mentioned, the only reason not to ‘filter’ all your purchases through a credit card would be due to the inability to have self restraint/control when there are funds available. Use the card like it is your debit card, and reap the benefits!
Exactly Dividend Wisp, that’s why we use our travel reward cards for every single purchase that we can. The ability to pay later helps too, as your money sits in the savings account and earning a small amount of interests (anything helps right?).
When I see advice like that I kinda feel like that it’s more geared towards people on the beginner/struggling stages where something, anything that gets them on the right path is a game changer. Whereas you’re more in the advanced/micro-optimization stage.
Just like it’s difficult for someone who’s really overweight to go jump straight from bad habits to the kind of workout/prep that a serious bodybuilder does.
I realize it’s more geared toward people on the beginner/struggling stages with their personal finance. My main beef is that these gurus should have not grouped everyone under the same group and should perhaps be more specific. I’ve seen many younger folks at work that don’t use credit cards simply because these gurus’ advise. They use cash only and don’t ever plan to get a credit card, even though they manage their money quite well.
The advise should be like… if you are a beginner, use cash. Once you can control your spending, utilize rewards credit cards to maximize your earning.
Yeah I’d agree with that, at least a mention like “And if once you’ve got this mastered, there are some awesome tricks to check out…”.
That’d help getting some of these younger folks out of the scary “never ever use credit card” cave for sure.
We are on the same boat. Example – By using Gap’s credit card for outside purchases, our clothing expense has been significantly reduced. We’ve been buying their clothes for a few dollars compared to full price. Of course, we are ‘deadbeats’ since we pay off the credit every month.
Not aware of Gaps’ credit card but that sounds fabulous to be able to reduce clothing expense.
Great post, agree 100 percent!
The finance gurus make the point that if people overspend with their credit card to buy 20% more of stuff they don’t need then even with the 2-5% reward it’s still a net negative. True, but I still agree with you: have a budget, stick to it and collect the reward points. That’s far better.
But budgeting and keeping track of it is hard. Finance gurus are in the business of selling simple rules and heuristics. Their advice basically has to fit on a bumper sticker. Hence, we can safely ignore their advice on the credit cards, emergency funds and a lot of other things, too.
PS: We have a card that has 2% cash back on everything, but you can boost that to 3.333% if redeeming on travel expenses. Why would anyone not use that?
Very true that if people end up buying 20% more stuff with their credit cards, the 2-5% reward doesn’t make any sense. Budgeting and keeping track of it is hard but that’s why personal finance is so much fun. 😉
Very true about the gurus are in the business of selling simple rules and heuristics. I just wish that the advice would be more exclusive, like for people who can’t control their spending, instead of grouping everyone under the same umbrella.
I have received $300 in credit cards rewards year to date. The money is not considered taxable income so it all goes to investing. Every little bit helps, right?
Every little bit definitely helps!
This is a great strategy for anyone who is redponsible and disciplined.
I have been doing the same thing this year by letting the Rewards build up and then I intend to invest them. Letting my Rewards truly reward me!
Using rewards for investing is a great strategy.