This is a guest post from nickel, who writes about personal finance over at FiveCentNickel. And since that, combined with his four kids, don’t keep him sufficiently busy, he has recently launched yet another site, this time focused more narrowly on credit cards. Unlike me, Nickel uses credit cards. We’ve had several back-and-forth discussions about the subject.
If you’ve ever read my writing at either of my finance-related sites, you know that I’m a big fan of ‘gaming’ the credit card system. Why not? If you’re careful, you can make a good bit of money via credit card bonus offers, reward credit cards, and (for the really brave) playing the 0% credit card arbitrage game. Hmmm…
Why not? Well, let me tell you…
Credit card companies want your money. It’s as simple as that. They don’t offer these deals out of the kindness of their heart. They’re after one thing: paying customers. Obviously, card issuers end up earning enough money (on average) from those that apply for these deals to earn a healthy profit. If you’re in this to turn a quick buck, the key is to be below average. Unfortunately, that typically requires being very, very careful.
So what are the risks?
Signup bonuses are relatively innocuous, in that you can simply cancel the card after getting your bonus. Moreover, a single application can net you $100 or more. Sounds pretty easy, huh? It is, but… The vast majority of these deals typically require a purchase before you get the goods. The card issuers are thus counting on you getting the card, making that first purchase, and then keeping the card in your wallet. The good news is that, in many cases, your first purchase can be as large or small as you want. Nonetheless, you still have to keep track of the card, make sure you pay off that initial purchase, and then cancel it.
Next up, reward cards. What could be easier than earning cash back on things that you already buy? You’d be foolish to turn your back on up to 5% off every purchase. Right? Well… The other thing to keep in mind that is that studies have reportedly shown that (on average) people spend more with credit cards than if they were paying with cash. Moreover, if you don’t have the discipline to pay things off in full every month, you can quickly find yourself mired in credit card debt.
Finally, what about 0% balance transfer credit card offers? While these can be a great tool for killing of your high interest debt, they can also be used to generate cash on the side. In short, the goal of balance transfer game is is to borrow money at zero percent, stick it in a high yield savings account, pay the minimum amount due each month, and collect your profit in the form of interest payments form the bank. Sounds simple enough, but there are a number of risks here.
For starters, if you make a late payment, the card issuer might jack up your interest rate. Moreover, you have to keep close track of the end date of the promotional period or you could get stuck with a hefty interest charge at the tail end of the game. And guess what? If you make any purchases on the card, chances are any payments that you make will be applied to the lowest rate portion of balance first. In other words, that purchase that you just made will accrue interest until you pay off the balance in full.
Admittedly, this was a much more attractive proposition before the recent spate of interest rate cuts. But even when rates were hovering around 5%, you’d have to carry upwards of $20k in 0% credit card debt in order to pocket $1,000 of profit over the course of a year. Is it worth the risk? For some people, yes. But for others, no.
Setting aside the specifics of any particular offer, another thing to consider is your credit score. While the effects of credit card deal chasing on your credit score are typically short-lived, the extra credit checks associated with applying for a bunch of credit card deals can ding your credit score, and carrying large balance on a 0% credit can likewise drag down your score.
So there you have it. The world of credit cards is fraught with risks and, for many people, it’s just not worth it . As for me, these factors haven’t been enough to discourage me from taking advantage of credit card deals. That being said, I treat it a bit like a hobby, and thus don’t mind spending the extra time and effort to keep things in order. And since we already have all the credit we need, I’m not particularly concerned about temporary dips in our credit score.
As you can see, Nickel and I both agree that there are risks associated with the use of credit cards. Nickel chooses to use them, and I think he does a good job of managing those risks. And I choose not to use them, so as to avoid the risks altogether.
7 thoughts on “Credit Card Companies Want Your Money – A Guest Post From Five Cent Nickel”
Thanks you for the post Nickel, I have been tracking all my spending for over a year now, and have no CC debt, just mortgage and student loans. I am seriously considering starting to deal with some of these offers soon.
I agree that this is just another way of playing a game, and if you don’t enjoy dealing with all of it, then you would probably be best served to just leave them alone outside of the sign up offers.
I know myself as well. I know that if you reading a personal finance blog you usually can control your spending. Maybe I’m wrong.
Great article, thanks! The intent these companies have is to hook you, for sure. What they want is for you to run up a balance and pay the minimum, preferably until you die. I do feel some regulation is in order, but doubt we’ll see much of that anytime soon. Until then it’s definitely Caveat Emptor!
There may be some risks with 0% arbitrage game, but I see little risk in just using credit cards if you pay in full every month. As to the overspending studies: the average in the case of overspending with cards includes people who spend a whole lot more and run up huge debt. Combine one person who spends 100% more with credit cards with 9 people who spend about the same and you’ll get “people spend 10% more on average”.
Payments can be automatic. With automatic payment of the full balance the full balance is deducted from your bank account on the due date. You are guaranteed to never be late even if they change the date.
The trick to not overspending is to decouple the decisions to buy from the decision of how to pay. I’ve never seen why it can be any other way – you have to pay for it anyway, so what is the difference? Those who cannot do it should probably avoid cards. This requires thinking before making a purchase, but this is a necessity even if you spend cash. You cannot spend more than you have with cash, but spending all you have is often a bad idea.
Joshua – I’d thought so too, but I later found out that some of the financial bloggers and readers are indeed struggling with paying debt.
“Signup bonuses are relatively innocuous, in that you can simply cancel the card after getting your bonus. Moreover, a single application can net you $100 or more.”
I really don’t want you to encourage people signing up for cards and canceling them immediately. Every time you apply for a card, your credit report gets a hard inquiry, which dings your credit score. Applying to many cards in a short period of time is a red flag to other credtors because it makes you look desperate. Additionally, every time you close an account, you ding your credit score. So while this can be fine from time to time, this is not something that should be done with any sort of frequency. If you will be applying for car insurance, a loan, or mortgage any time soon, this is a bad idea. If you don’t need a great credit score, go ahead. Just be aware that signing up and dumping cards left and right will lower your score.
Also, arbitrage (or stoozing) — when you take the 0% money, put it in high yield accounts, and bank the difference — is something that should NOT be attempted by someone in debt. It is a great tactic if you are in the black, very on top of things and want to make a little extra money, but if you are already in debt, you do not want to risk getting behind even more. Additionally, utilizing that much of your credit limit will lower your credit score, which is not a good call if will be needing a loan or mortgage soon.
I am all for the responsible use of credit cards. You’ve gotta be careful with them – but then, you’ve gotta be careful with everything! If you don’t have the time or inclination to be careful, then you probably shouldn’t use credit cards, but there are certainly ways to use them responsibly. 🙂
I had never thought of getting a 0% credit card and then putting the money in a High Yield bank account. How do you go about doing that once you get the credit card though? Do banks allow you to transfer money from your credit card into the bank? If so, that’s a great way to earn some extra money! It’s better than credit card sign up deals that I already do.
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