We are not fans of credit cards for those who are just getting started, learning to save, or trying to get out of debt. Studies suggest that most people spend about twice as much with a credit card as they would with cash. You need to be wary about every use of a credit card.
Most people would be better off without a credit card, but there can be advantages to owning one. For those who can use a credit card responsibly, it is worth taking a look to find the offer with the most advantages. To decide that, it is important to know what your spending is worth, and thus whether the rewards they offer you are a good deal.
Your everyday spending is extremely valuable to credit card companies. As a result, I don’t think you should have to pay an annual fee for a credit card on which the credit card company is already going to make money. Credit card companies charge merchants a small transaction fee plus a percentage of the transaction. If you use your card in person, the fees range from 1.5 to 2 percent. If you are using your credit card over the phone or on the Internet, the fees range from 2.2 to 3 percent because of the greater chance of fraud.
Many consumers are attracted to credit cards with miles- or points-based rewards systems. But credit card companies are adept at offering as small a perk as possible and dressing it up to attract and retain profitable credit card consumers.
Airline miles are often not used, and their value is difficult to calculate. Years can pass between earning them and using them, decreasing their value by the time value of money. These non-cash rewards usually don’t exceed the value of 2% cash back.
Points toward a specific purchase or a specific store may also be subsidized by the store. Additionally, points and rewards inflate a particular part of your budget, usually travel spending or shopping at one particular store, whereas cash back can be used in whatever area you need (or want) it most.
You never see credit card companies taking their share of the profit as reward points – they are smarter than that. For this reason, we favor rewards in the form of cash back as well.
Some credit cards offer 3% on specific purchases for a limited amount of money and 1% on everything else. They might offer 3% on groceries and gasoline up to the first $1,000 of purchases every month and 1% on everything else. If you spend more each month on groceries and gasoline than you do on everything else, this card might be attractive. This is not the case for me. Alternately, they might even offer 5% cash back on purchases from their specific company or website.
Studies suggest that credit cards double spending. Even if they only boosted spending by 5%, these sites would make money on such offers. If you use a different credit card for each type of purchase you might be able to game the system and squeeze 3% cash back out of some limited amount of purchases. But like rewards and miles, these can distort your spending and that is probably better to avoid.
I know people who play the credit card roulette game of opening and closing credit cards for their initial bonuses and select a different credit card for each vendor in order to maximize their rewards. Personally, I’m too busy trying to earn money through the hard work of running a business to play that game. I’d rather just receive a straight unlimited 2% cash back on every purchase I make.
I’ve only seen a couple of credit card offers with rewards of 2% unlimited cash back. The first was prior to 2008 when Schwab had a credit card where 2% cash back was deposited directly in your investment account. This card had the advantage not only of giving 2% cash back but of increasing your saving and investing by 2% of what you spent rather than flooding your credit card balance where the extra savings was sure to be spent.
The second 2% cash back card is a Fidelity Investment Rewards American Express Card which is the primary card I use for my daily purchases. It is exactly like the Schwab card, putting the 2% cash back directly in a Fidelity Investment account. The rewards are unlimited. The drawback is that American Express is not accepted at some of the places I regularly make purchases.
Credit card companies make their money from merchants even if you pay off your balance every month. And they make their money from you in the form of extremely high interest rates whenever you fail to pay off your balance every month. Their biggest risk is when you get a credit card, run up a large balance, and then walk away from your obligation to pay. As a result, credit card companies are willing to offer a greater reward if they can attract responsible consumers.
Last year, Citi launched a new product directed toward those most likely to pay their balance each month: The Citi DoubleCash credit card.
The Citi DoubleCash credit card offers 1% cash back on purchases and an additional 1% cash back on payments. So for those who use their card and completely pay it off each month, they earn 2% cash back. I like this feature because it limits the attractiveness of the card to responsible consumers of credit. And if only responsible people have this type of card, I think they ought to be able to give consumers a larger share of the money they are collecting from vendors.
There is no limit on the cash back. The card doesn’t try to change your purchasing behavior. Although it isn’t as good as putting the cash back into an investment account, it at least just gives you the cash without any strings attached.
It is also a VISA card, which is accepted in the few places my American Express is not. And there is no annual fee.
Not a bad choice, and certainly better than many of the credit cards I’ve seen people use.
We are not normally fans of credit card offerings, but this one might be worth using as your primary card.
Of course, as soon as you get a credit card you should always call the number on the back and deny permission for them to use your personal information for marketing. And for security you should have your credit locked down. You can lift the credit freeze for 14 days so that you can apply for the card.
Screenshot from Citi DoubleCash website.