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Losing Money With a Cash Rewards Credit Card

Bank of America, like most other banks, has recently introduced a new Cash Rewards card. The hook: 1% cash back on all purchases (2% in the first 12 months), 0% APR (in the first 15 billing cycles), and an extra 25% redemption bonus when you redeem $300 or more in cash back rewards.

I have actually been without a credit card for about 6 months now. My wife and I decided to do without it for a few months, and once we realized that we didn’t need it, we chopped it up and threw it in the garbage. It was just too much of a temptation to overspend. Plus, our debit card could do everything that our credit card did.

Even though we don’t have a credit card at the moment, we are still receiving the latest and greatest offers. And, to be quite honest, they are still tempting. I use to love watching my rewards build up! When I cashed them in, I didn’t just go out and spend the money frivolously; I used the rewards to reduce the monthly credit card bill. Although it seemed that I had the credit card under control, the rewards points were always in the back of my head, prompting me to buy something I didn’t really need. In fact, when my transmission went out on my old car, I remember thinking, “Well, it’s a big bill, but at least it’ll increase my rewards points…” Poor thinking. Getting $5 off from a $2,000 bill should not be exciting.

According to Dave Ramsey, those that purchase with plastic spend 18% money than those that purchase with cash. Quite honestly, this seems a little high to me, so let’s assume it’s only 10%. Even with the rewards on the credit card, I can guarantee you that credit card swiper is still spending more than the cash handler.

I think it’s time for a sample purchase:

In order to grant the credit users with the most possible rewards, we’ll assume that these purchases will yield 2% cash back (the 1st year promotion) and receive the 25% additional rewards when the cash back exceeds $300. So, let’s take a look at the table below:

*********IMAGE 11062010 table*************
Over the course of the year, Cash Man spends $30,000. Factoring in the 10% overspending of the Credit Man, this equates to $33,000. Because Cash Man does not receive any rewards, his final expense is $30,000, but Credit Man is ready to cash in those monster reward points! 2% of $33,000 yields him $660, plus he gets an additional 25% because his reward is larger than $300. This earns him a total reward of $825. That must be a fun reward to cash in, but he still had a greater final expense – $32,175. Sorry Credit Man.

There are a few other points that continue to keep me from these credit card offers:

– If we do not pay off the card every month, we have to pay the interest (this card is 12.99% after the introductory period).

Yes, I know I know; you pay off your card every month… I said the same thing, but I can remember times where I did not. Sometimes we get that crazy huge bill that we were not expecting, and it takes us a while to get the balance down to $0 again. It happens, and therefore, we pay interest to the credit card company.

– When we pay with cash, we can get a deal.

This may not be the case in all retail stores, but there are plenty of places where you can flash some cash and get yourself a discounted price. This cannot be done with a credit card – it does not have the same emotional impact, plus the merchant has to pay a small portion of your purchase to the credit card company.

The credit card is certainly very handy, but ultimately, you will have a greater expense at the end of the year if you continue swiping that plastic. Why not start trying to pay with your debit card or cash? Notice how your attitude changes on every purchase. Suddenly, you will become very conscious of your spending, and you will notice more money staying in your bank account.

Credit Cards Money


My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

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