As I recall, it was the late WBZ radio host Lovell Dyett who used to say, “Spend your time wisely. It’s the only money you’ve got.”
I found myself thinking about that when reading a Page 1 Wall Street Journal article about people who get credit cards to chase bonus points and credit card rewards. One individual has 29 credit cards!
Apparently the chance to get “free” travel is a big draw. One man mentioned in the article has two dozen credit cards at what could easily be an average annual fee of $200 per card. Since 24 x $200 is $4800, he’s already “paying” quite a bit for the “privilege” of earning that “free” travel.
(His fees may be less per card. Maybe he even gets a few with “no annual fee” for the first year. But some of these credit cards charge much more – up to $450 and even $550 a year. So I am using $200 as an average for our discussion here.)
The annual fees are in addition to the several thousands of dollars’ worth of purchases he needs to rack up – usually over the first 3 months – on each card to get those bonus points. And that doesn’t include the really priceless opportunity to mess up his credit in a big way, which I will get to in a minute.
Would that gentleman be better off just spending the annual fee money on travel? Probably – though I am willing to bet he might not see it that way.
Because – for many people – playing the credit card “rewards game” is their hobby. They’re absolutely convinced the freebies are worth it.
Maybe they’re always talking about the time they got a “free” deluxe trip for the whole family. But it probably took some serious money outlays and time to accumulate and keep track of those rewards and then claim them … a bottom-line reality the credit card hobbyists may or may not be willing to get into when boasting about their rewards. But “a free lunch”? Hardly!
Can having so many credit cards hurt your credit score? Possibly. For example, another person mentioned in the Journal article discovered they could get 5% back on furniture purchases. Apparently, a friend needed some furniture and the card-holder hatched a plan to put it on their card, getting the 5% back, giving 3% to their friend and “netting” 2% for themselves.
If that furniture cost $5000, the cardholder gets $250, rebates $150 to their friend and “makes” $100 on the deal. Of course, there’s no talk about what happens if the friend reneges on re-paying the $5000. No sense of danger or “Oh, what could possibly go wrong with that?” For a hundred bucks – wow!
That’s the kind of thing that could easily lead to a credit score disaster. So could spending more to stretch to reach a credit card points goal and ending up behind on the payments – incurring all kinds of interest charges and late payment fees. Thinking a card was cancelled that actually shows as “in default” with a few dollars left on it – that could be a problem. Or appearing to have too much credit available. Any of those could look bad to a lender.
Am I against credit card rewards programs? Nope. But I am against taking financial chances like spending more time and more money to get those rewards than they’re actually worth. Remember – the credit card companies’ models show they will come out ahead in the long run. Not the card-holder. And just because something gets spotlighted as “a clever idea everyone’s doing” … that doesn’t mean that it is.
Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. “Smart About Money” is a regular column he writes for the Canton Citizen. Have a financial question you’d like to ask? Email to firstname.lastname@example.org.