APU Business Original

Smart Personal Finance 101: Using Credit Cards (Part II)

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By Dr. Gary L. Deel
Faculty Director, Wallace E. Boston School of Business

and Dr. Karin Ford-Torres
Faculty Member, Wallace E. Boston School of Business

This is the sixth article in an ongoing series on sound tips for financial security and prosperity. Nothing in these articles is intended as formal legal or financial advice. Readers should consult an attorney or licensed financial advisor before making any financial decisions.

In the first part of this credit card discussion, we talked about how credit cards can be powerful financial growth tools if consumers take full advantage of their rewards. However, we also discussed how banks often use complicated and confusing rewards systems like “points” to deceive consumers about the actual value of their kickbacks.

In this article, we’ll look at how banks do this in an even sneakier way with credit cards that offer reward “miles.” We’ll also discuss better options for credit card reward programs. And finally, we’ll close with some additional tips for responsible and strategic credit card use.

The ‘Air Mile’ Rewards of Credit Cards Can Be Deceptive

Credit cards that offer “air mile” rewards are popular, especially for consumers who like to travel. But we would argue that this model of rewards is even more deceptive than points. Unlike points, which have no single definition in regular everyday conversation (i.e. points mean different things in soccer, golf, baseball, etc.), “miles” are not subject to the same ambiguity. A mile is 5,280 feet. Always.

You would think it would be that simple, but it’s not. Just like with points, credit cards use conversion ratios for “miles” too. So a credit card reward “mile” is not the same as an actual mile traveled.

Dr. Deel learned this lesson the hard way years ago when he had an airline reward miles card. At one point, he racked up nearly 50,000 “miles” through purchases, and he was excited. After all, 50,000 miles are enough to circle the globe twice. He started thinking about all the fun places he could go and the things he would see.

But when he went to the airline’s website to redeem his miles, he was shocked and disappointed to find that a trip from Orlando to Las Vegas — a distance of roughly 2,000 miles — was going to cost about 26,000 reward “miles” because of the airline’s arbitrary conversion ratios. “What a con!” he thought. Suffice to say he stopped using that card.

This kind of reward “miles” controversy is not at all uncommon. In fact, Southwest Airlines just recently made (negative) news headlines for arbitrarily devaluing their “miles” overnight.

Switching to a Credit Card that Offers Rewards as a Flat Percentage Is a Better Deal

Instead, Dr. Deel switched to a card that offers rewards in a flat percentage rather than deceptive “points” or “miles,” and that’s what he has been using ever since. Dr. Deel’s credit card of choice today kicks back 2% of everything he spends using it. That’s it. No tricky conversions or sneaky rules. Just 2% back, period.

Two percent may not sound like a lot, but he has been using that credit card for more than 10 years now, and he has already received more than $10,000 in rebates. So 2% really adds up over time.

Because of these valuable kickbacks, he uses his credit card for everything he possibly can. Gas, groceries, clothes, food, movies, travel, utilities…everything. In fact, there are only two circumstances under which he doesn’t use his card. The first is if the store or business does not accept credit cards, in which case he is obviously forced to use cash or some other means of payment.

The second is when the business adds a “convenience fee” of 2% or more for using a credit card. Credit card companies add a transaction fee on businesses that process them.  Some businesses try to pass those fees on to the consumer through fees or surcharges for paying by credit card. The common use of the term “convenience fee” to describe these additional costs is more than a little ironic.

Credit card processing fees for businesses are usually in the 2.2 to 2.5% range, which means the convenience fees passed on to customers are usually about the same amount. And, unfortunately, if the convenience fee is 2% or more, then the fee obviously eats up all of the 2% kickback that Dr. Deel would be getting later from the bank in rewards on his credit card. So in those cases, it’s usually cheaper (on balance) for him to just pay with cash or debit card.

But everything else is fair game. By using his credit card for all purchases, and then paying the balance in full each month, Dr. Deel reaps the maximum benefit available without any downside. He pays no interest whatsoever and gets to keep all the kickbacks. Some might wonder why banks would even offer credit cards like this to consumers like him, in a scenario where they’re clearly losing money.

But again, remember that they are charging the sellers credit card processing fees, so the bank isn’t really losing anything at all. It’s still making a killing on vendor fees and just passing a little bit of that back to the card holder as a value-add to remain a customer. And of course, the vast majority of credit card holders carry a revolving balance, so the bank profit is usually much larger than in Dr. Deel’s case, because interest is involved.

When Deciding on a Credit Card, There Are Various Features to Consider

Obviously, these are not the only factors that matter when deciding on a credit card. There are other potential cost considerations, like annual fees. Not all credit cards have them, but if a card does, then you obviously have to factor in this fee when conducting the overall value analysis.

You should also consider additional benefits with certain cards, like fraud protection. Banks commonly offer purchase monitoring and anti-fraud programs to help protect their customer accounts from unauthorized use. So this might be an important selling point as well, depending on the details.

Credit Cards Are Useful, but Their Responsibilities Are Not to Be Taken Lightly

Despite the potential upsides, it’s worth reiterating that someone who cannot handle a credit card responsibly can suffer terrible financial consequences. Interest on revolving debt can be crushing. You could destroy your credit score if you fail to make payments on time, and you could also very easily drive yourself into bankruptcy.

So credit cards are not something to be taken lightly. They’re not “free money,” and no financially astute consumer would ever get a credit card and then spend beyond his means. But of course, banks are happy to let you do this at your own peril, as that’s when they really make their money. So do your homework and be careful.

In the next parts of this series, we’ll look at investment strategies for growing personal capital, including real estate, securities and other options.

The university offers academic programs in accounting and finance, which cover important financial discussions in depth. Readers who are considering expanding their knowledge and credentials in this field are encouraged to visit our program pages for more information.

About the Authors

Dr. Gary Deel is a Faculty Director with the Wallace E. Boston School of Business at American Public University. He holds a J.D. in Law and a Ph.D. in Hospitality/Business Management. Gary teaches human resources and employment law classes for American Public University, the University of Central Florida, Colorado State University and others.

Dr. Karin Ford-Torres is an Associate Professor with the Wallace E. Boston School of Business at American Public University. She holds a Ph.D. in Business Administration with a concentration in Advanced Accounting and Financial Management. Karin teaches accounting and finance courses for American Public University, Purdue University Global and Colorado State University-Global. She has 24 years of prior banking experience with Bank of America.

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