Congratulations!
You just kicked off a week of R&R at a tropical paradise!
And best of all, the travel isn’t costing you a dime because you used your FLIGHT REWARDS
CARD!
Feels good to get something for nothing, doesn’t it?
But air travel isn’t cheap.
And credit card companies aren’t known for their charity--or stupidity.
So, what’s the catch?
You might be surprised to learn that that “free” flight you just booked might be
the most expensive one you’ve ever taken.
Starting with the Diner’s Club Card in 1950, Americans instantly fell in love with plastic.
Within just a generation or two, credit cards went from being a perk for wealthy world travelers
to a practical necessity used by over 70% of U.S. households.
And what’s not to like?
As long as you pay your bills on time, it’s basically an interest-free loan!
And then there’s the Rewards programs: cash back, in-store discounts, and of course, airline
miles.
With all that generosity, how on earth did credit card companies manage to post $163
billion in profit in 2016 alone???
Turns out credit card companies make their money in a few different ways.
They charge merchants a fee for processing your payment, which is often passed on to
the consumer in the form of higher prices.
And they sell user data to marketers, so you might get hit with more advertising.
It’s hard to quantify exactly how much these factors affect you, but there are more direct
costs to being a credit card user.
Most Credit card companies have fees attached — especially if they’re an airline or
other rewards card.
Missing a payment or over-drafting will also incur late fees or cash advance fees.
One study showed an annual card-holder fee range of $25 - $550 for cards linked to a
rewards program, with the average annual fee of $147.
You might still say you got a 'good deal' on the flight, but if you pay $147 for a free
thing… it’s not free.
Just sayin’.
And simply paying that fee doesn’t guarantee you’ll actually receive any benefit.
A Bankrate.com study found that 31% of airline miles never get redeemed at all!
That’s at least in part because airlines make it increasingly difficult to actually
cash in on your benefits.
It’s such a pain, in fact, that services have started popping up like BookingGuru that
will help you pay for a flight with your saved up miles… for a $200 service charge!
When you opened your first credit card back in college, you probably told yourself that
you’d be responsible and always pay off your full balance every month.
I mean, who would PLAN on paying the U.S. average interest rate of 17%?
That would be crazy!
Well, easier said than done.
The New York Times reports that 60% of credit card holders don’t pay off the balance they
accrue each month.
Even the most conscientious of credit users can have a car break down a week before pay
day, or an unexpected trip to the vet for poor Mr. Fluffles.
The aggressive interest and late-fees charged to credit card holders have helped create
a wide-spread cycle of debt that many families spend decades trying to escape.
Credit card companies are incentivized to keep you carrying a balance as long as possible.
And even if you *never* pay interest on your cards, are you really getting the better of
the credit card company?
Or other credit card users?
The company can afford to let you “beat the system” only because they know that
other, less perfect customers will more than make up the difference.
So you might say that your cousin or friend who struggles with credit card debt is helping
pay for your trip.
Even if you can avoid fees and interest, credit cards still might be hurting your ability
to save money or pay off debts.
How?
By subconsciously affecting your spending habits.
A study by Carnegie Mellon found that spending cash activated the areas of the brain associated
with pain.
Swiping a card?
Not so much.
A landmark study by MIT found that on average, subjects using credit cards were willing to
pay almost twice as much for sports tickets than those using cash.
According to the Carnegie Mellon researchers, "The nature of credit cards ensures that your
brain is anaesthetized against the pain of payment.”
And rewards like airline miles are specifically intended to encourage you to use your card
more often.
The thought of earning a few more of those sweet, sweet points might be what pushes you
over the edge to go ahead and buy an extra pair of sunglasses or splurge on a fancier
hotel.
Even if you don’t wind up spending twice as much, imagine how much you could save if
you spent just 5 or 10% less a year by using cash!
That could seriously add up.
When you take these less obvious costs into account, you wonder whether it’s a better
idea to just buy a $750 plane ticket outright.
Which is not to say that you shouldn’t cash in your rewards if you have them, or that
anyone should or even could forego credit cards altogether.
Credit cards aren’t objectively good… or bad.
They’re a financial tool like any other that has costs and benefits, risks and rewards.
But it’s in these companies best interests to emphasize the rewards, and downplay the
risks.
And it’s in your best interests to take a step back and look at the whole picture.
And that’s our two cents!