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.