Everyday. Every. Single. Day.
Everyday, you see an ad for a credit card offering airline miles, cash back on certain purchases, a sign up credit, anything that sounds like free money back in your pocket.
How are they giving away free money, it doesn’t make sense? Well, there’s a reason that these lenders, banks and credit card services are still in business. People are buying into the system. These companies market all of the benefits that we can reap from their services, and just like that we’re sucked into the idea of “cash back”, and we’re sold.
Cash back sounds great, but let’s do the math. Where's Cady?
Currently, the Quicksilver Card for Capital One offers the following if you have good standing credit:
-1.5% cash back on every purchase.
You spend $300 on groceries that month, boom. $4.50 back in your wallet. That's a free box of cereal!
I know what you're thinking, that is so nice and will rack up fast, especially with grocery prices on the rise.
BUT, what else does this card offer? Glad you asked:
-29.74% APR, which is about 2.47% interest each month.
Yes, cash back sounds great, but at who's expense. It's definitely not the lender's.
What if you get behind on paying off your bill?
You do good for the first couple of months, using the card for groceries, gas, the basics and are able to pay it off each month. Then you add the card to your Amazon account, then you use it at Target, and it starts getting out of hand. I mean, that’s okay because you're getting cash back on all of these purchases, something you wouldn’t be receiving if you used your debit card, or even worse, cash!
But is it really worth it?
Say you owe $300 in credit card payments, sure, you got 1.5% back ($4.50), but do you know what they are charging on interest? 2.47%! You will owe $7.41 in interest that month alone. What happens if you get behind, and keep adding to your debt? Let’s see:
In these short 3 months, you earned $13.50 cash back, but are having to pay an additional $40.56 in interest alone.
Do you see what’s happening, this credit card company is offering you cash back on all of your purchases, yet charging you almost 2.5% in return. You are going into debt at 27% a year on all of your purchases. Can you afford that?
If you can, you should be using a debit card in the first place. On the flip side, if you can’t afford to go in debt at that rate, you should be using a debit card in the first place.
If you are not able to pay off your balance each month, the risk greatly outweighs the reward. And it’s at your family’s expense. And the lender's gain.
If these companies didn’t have it figured out, if they didn’t know how to make money off of consumers, then they would no longer be around. They would be struggling to survive. But they aren’t. You are.
In America, the credit card debt total is up to $787 billion, with the average household amount running about $14,000. And if you are looking at this number, saying, “That number is insane, there is no way I would ever let it get to that amount!”. I’m sure the ones who have that amount thought the same thing a couple of years ago, and yet, here they are.
But, out of that $14,000, I wonder how much of that is actually interest? How much of this amount is just profit for the credit card companies, and not money actually spent? Think about it. How likely is it that someone spent $14k in one month and is expecting to pay it off in the next 30 days? That scenario is very unlikely.
It probably started small, and then grew, they made a few payments here and there, yet it continued to grow until it became an overwhelming number that they can not afford. This could probably be called the original debt snowball.
Once this cycle starts, it is hard for it to stop. I know because we have been there. We started with paying our credit card off every month. But, then stuff came up that we didn’t want to pay cash for, we would rather pay it off little by little, so on the card it went. Well, that little by little turned into a lot really fast because we weren’t budgeting to pay it off. And soon, we were looking at a credit card debt that made us very uncomfortable.
It also made our budgeting very difficult. I would set a budget, but had to track different accounts to see just how much we actually were spending. And even then, it was not right because stuff would get overlooked, forgotten about, and then we’re at the end of the month wondering why nothing added up and we were still in debt.
It happened very quickly. Soon, the money we should have been putting towards our loan debts, went towards our credit card consumer debt and our debt snowball kept getting smaller and smaller. We had to make a change.
We analyzed where we went wrong, and the culprit was 100% our credit card. Large purchases that had to be made from daycare expenses to monthly grocery hauls began the downfall, and then that continued to larger purchases that were not necessary. Our thought process was, we might as well put it on the credit card so we’ll get money back, then we’ll use that money to pay off some of the credit card debt. And it did not work in our favor.
Do you know how long it takes to earn $100 cash back for you to turn around and put it towards debt?
In the 1.5% cash back example above, it will take you spending over $6,500 to get $100 back. And at that point, what is that $100 going to do towards this debt? Literally, nothing. Especially if you are being charged interest.
You are going in debt, going into debt.
You make purchases on a credit card, that means you owe someone something. This is the definition of debt.
You are charged interest on those purchases, that means you owe someone even more. That is going into debt on top of going into debt.
What is the takeaway?
- Cashback, airline miles, rewards, and anything offered by the credit card companies and lenders are bait. Don’t bite.
- If you have no debt, you should be using a debit card in the first place. If you have debt, you should be using a debit card in the first place.
- If you are not able to pay off your balance each month, the risk greatly outweighs the reward. And it’s at your family’s expense.
- Be smart with your money, because no one else is going to be!
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