Progress to Date

  • Original Loan Amount: $204,000.00
  • Balance at Beginning of 5-year Goal (1/1/08): $188,983.82 @ 6.00%
  • Balance at Refinance in February 2009: $148,000.00 @ 4.625%
  • Outstanding Balance: $0.00 (PAID IN FULL!!!)
  • Latest Payment Date: April 2011
  • Latest Additional Principal Amount: $17,623.22
  • Amount Ahead of Schedule (since refinance): $121,462
  • Time Ahead of Schedule (since refinance): 7 years 10 months
  • Interest Saved Last Month: $23,972.48
  • Total Interest Saved: $28,435.55 ($1,037.74 on original mortgage; $27,397.81 on current mortgage)
  • Months Remaining in 5-year Goal: 20
  • Average Monthly Principal Needed to Meet Goal: N/A (Goal achieved)
  • Progress List Explained

Wednesday, February 3, 2010

Credit Card Strategery

My wife and I recently received a credit card "reward" payment, which is something of a regular occurrence for us. I've been receiving them for years, but for whatever reason I had never thought to keep track of them until the most recent one appeared in our savings account.

If you've ever read any news articles about credit card companies, you may have heard that they use endearing terms like "deadbeats" or "freeloaders" to describe customers who make purchases on credit each month, but who pay off the balance in full by the due date (thus avoiding any interest charges). I hope we always fall into this category, since I'm not a fan of paying interest to anybody. We're using our credit cards as if they were charge cards, which no longer seem to be in fashion here in the US (but may still be elsewhere).

We keep three active credit card accounts. One is our primary card, which offers "rewards" of 2% on every purchase. Our backup card offers 1% back, but occasionally offers special rebates of 3-5%. We also have a Discover card, which ordinarily pays a very paltry "cash back" rate, but which features a 5% "reward" on a certain category of spending (like gasoline or groceries) which changes every few months.

Over the past year, we've received $600 in rebates from the credit cards we use. We just dump this money into our savings account, so I was able to sort through our transaction history online and find each of the credits, typically appearing in amounts of $50 or $100. Assuming a 2% rebate rate, that means we spent at least $30,000 on our credit cards over the last twelve months. And I'm happy to say that we didn't pay interest on a dime of it.

It seems like personal finance bloggers fall into one of two camps when it comes to credit cards. One group avoids them at all cost, citing the tendency to overspend and lose track of purchases. The other group (which includes the wife and me) embraces the "charge card" method of using credit cards for most purchases, which allows the convenience of cashless transactions, consolidated spending reports, and the rebates that come along with most cards held by responsible spenders.

I used to think that by using our credit cards this way, we were getting an "automatic two percent discount" on everything we buy. I've come to the realization that we're probably doing something more like paying the true cost of things. Since credit cards assess merchants a fee for each transaction, which apparently can range from two to four percent of the charge, merchants typically respond by raising their prices by the same amount, and passing along the expense to their customers (usually regardless of whether the customer uses cash, check, debit, or credit). Some frugal shoppers try to avoid this by negotiating discounts for cash transactions. We just try to use the card which will offer us the largest rebate on each purchase.

We have debit cards which we could use in a similar fashion, but in my opinion debit cards fall short of credit cards in a few areas. First, the money is withdrawn from the associated checking account immediately. This means that if there are any mistakes, the account is more likely to be overdrawn. And I'm sure our bank would be more than happy to charge us one (or more) "overdraft protection" fees if there was any sort of mix-up. Some merchants (like gas stations and restaurants) will reserve more than the purchase price as a "temporary authorization" which could also lock up our checking account if we paid with the debit card more often. For example, my wife bought gasoline from a station which charged a $250 preauthorization last week (the actual amount of gas she purchased was about $20). Since we used a credit card, it didn't cause us any issues -- as we never come close to reaching our credit limit, this was not a problem.

Other reasons I prefer using credit cards over debit cards, in no particular order:

  • Our checking account history shows only one payment to each credit card every month, along with our other bill payments. This makes it easier to reconcile spending when there aren't a bunch of little expenses on the statement.
  • Though "reward" debit cards exist, I haven't found one which rebates as much as the typical "reward" credit card.
  • I can budget for an expense without having to have the cash for it right away. Since the two of us get paid in regular intervals, it makes sense to have our expenses debited at regular intervals as well. I know when credit card bills come due, and I can plan to have cash allocated to cover that bill as needed. With debit purchases, I think we might modify our behavior to purchase items at only certain times of the month. This seems like an unnecessary inconvenience to me.
  • We can pay for occasional business expenses (for which we eventually get reimbursed) without having to immediately allocate some of our own money to cover the debit. And, as a bonus, we get the rebate for those purchases as well.
Having said all of this, I still keep a close eye on our credit card spending, typically logging into our account four or five times a week to make sure our spending is in line with our expectations. I also make sure to read everything that the credit cards send to me so that I'm not caught by any surprise changes in terms. For example, if one of our cards ever started to charge an annual fee, or removed the grace period for purchases, I would immediately pay it off and cancel the account. I'm not about to give the credit cards any extra money in fees or interest. If the credit issuers ever decided to change terms at an industry-wide level, we'd ditch our credit cards and use another spending strategy. But until that happens, we're satisfied with being a couple of "deadbeats".


Middle Way said...

We are members of the credit card deadbeat club too and I'm proud of it.

Our main Visa gives travel points as well as the whole gamut of travel insurance and car rental insurance. With how we like to travel, that is a great thing.

The best part is because I used to have a business account with them, the fee for the card ($120/yr) has been waived indefinitely. I like getting a bonus for something I am doing anyway.

Miss K said...

I agree with you. Credit cards are awesome when you use them sensibly- why would you turn down free money and the convenience? Personally i don't find it difficult to pay off the bill in full every month!

RainyDaySaver said...

As I've never had a problem with credit cards (the CC debt we've been paying off is my husband's and new house-related), I can definitely see the advantages to using the credit card. I use our debit card in most cases, but why not move from one plastic card to another? I'm looking into CCs with rewards/points now that we're thisclose to having the CC debt done with.

ashley said...

I am the same as you and your wife-- I don't believe in the whole "credit cards are evil" mentality. I mean, they definitely can be, but if you are careful and responsible you can get some good things out of the relationship too! I use my credit cards for almost everything, every month. But at the same time, I won't use my debit card so that I still have the money in my checking account once the bill comes in. I figure why not get rewards for doing normal things like buying groceries or gas?