You know that guy in your circle of friends that just got back from a 3-week backpacking trip through Europe? Or that girl that’s somehow always taking a road trip to some picture-perfect destination in her brand-new wardrobe? Would you believe that they pay for all of those awesome things with credit card points? Yeah, me neither.
Discover (and AmEx, and Visa, and MasterCard, and Kohl’s, and Nordstrom, and Sears, and Target, and Home Depot, and on and on and on…) has a great business model. All they have to do is buy whatever you want, whenever you want it. That works out great for you and me, because it means we get… well, whatever we want, whenever we want it. On paper, credit cards are the best thing since refrigerated cheese. You get secure, reliable access to money pretty much anywhere in the world without having to lug around big wads of cash or risk losing checks with all your personal information on them. And to sweeten the deal even more, they even entice us further with fancy stuff like cash back, airline miles, and freebies of all kinds just for using their card. All for just a signature on an application!
Of course, you and I are very smart people, and since we are smart people, we know that they have to have some way to pay for all of these things they’re giving to us. We also know the two major ways credit card companies make money: interchange fees and interest charges. We don’t ever see the interchange fees unless we are on the merchant side of a transaction because they’re essentially built into the price of most things we buy now. And interest rates are about the most basic form of making money with money. You lend someone $20, they pay you back $25, boom, that’s interest in a nutshell. But, remember how smart we are? We never pay interest, because we always pay our balance off in full every month without exception, right? Oh, you too? Yeah, funny how those months sneak up on you. Except, they don’t sneak up on the credit card companies, and interest charges mean big income for them. They bank (no pun intended) on those months happening, and it seems to be working pretty well for them. I don’t know of anyone who signs up for a credit card thinking, “I plan on overpaying for everything I buy with this card by at least 20%!” Everyone, myself included, signs up for cards as a “just-in-case” plan, or with the thinking of, “I’ll use this for stuff I’d buy anyway, then pay it off and swim in the rewards points!”
If everyone actually followed through on that, credit card companies would be really struggling, or at least a lot more than they are now. The reality is that the people with the best intentions are the ones that are struggling the most. According to NerdWallet, the average US household had over $15,000 in credit card debt as of Q2 of this year. Together, we all owe almost $730 billion. That’s a lot of free toasters. The interest on those cards averages around 18%. Eighteen. Percent. That means that with the average APR on the average card balance, the average family is paying almost $3,000 a year in interest alone. That’s not even including the interest you pay on your student loans, your car loans, or your mortgage. What could you do with an extra $3,000 this year? Probably a lot. But credit card companies know that what we say we’ll do with a card and what we actually do are wildly different, and we end up giving it to them instead.
I signed up for my credit cards with the same intentions that I hear most people echoing when they advocate for them. I’d use it for things like food, gas, and emergencies, pay it off immediately, and use the rewards for fun things I wanted down the road. I started getting into trouble, though, when my definition of “emergencies” began to widen. It started out with the thinking that if I was stuck on the side of the road somewhere, my credit card could get me home. That’s all well and good, but I never budgeted for those events to happen, so I didn’t really have a plan for the few times they did happen. Then, “emergencies” began to mean if a really cool thing I had been wanted for a long time was on sale, I could buy it with my credit card and then pay back less money to the card than I would have if I’d saved up and missed the sale. Then, it meant that when my checking account went down to zero, I could use my card to fill the gap until next payday. Before I knew it, I was almost $10,000 in the hole with no idea what I’d even bought. Discover noticed and threw me a rope. They sent me an offer of a personal loan through them at a much lower rate, giving me the opportunity to reset the balance on my credit card and start again. Again, Discover is not a benevolent, altruistic company. They are in business to make money, and they’ve spent a lot of it in figuring out how to make more. I should have seen that through the details of this offer, but instead, I took it thinking “this time, things will be different.” Things weren’t different. My credit card was now paid off, which meant it was free to use once again. My behavior hadn’t changed, and as you can see in the updates that I’ve been posting, I ran it up nearly to where it was the first time doing the same exact stuff I vowed I’d quit doing when I transferred the balance. I have a feeling Discover knew I’d do that, because now I owe twice as much as I did before the loan, and they’re getting two payments from me every month instead of just the one. I took the rope they gave me and used it to rappel further down the hole I’d dug instead of climbing out.
How did they know this would happen? Because they’re smarter than I am. They’re probably smarter than you are, too. This has happened to countless other people before, and it will happen to countless people in the future if we don’t get smarter about our money. They invest millions of dollars figuring out how to make money off of people like you and me. I just want to buy a TV. Credit card companies know that life happens, and that most of the time, people are unprepared for it. We are emotional, impulsive creatures, and we will make mistakes with credit cards that will lead to slavery to our lenders. I know there are people out there that can play this game and win, just like there are people that hit it big at casinos. But for the other 99.9% of us, the only way to win is by not playing. Budget for emergencies, don’t rely on a card that charges 18% to cover them. Save for vacations, don’t spend hundreds of dollars on interest trying to earn one. I knew I was smarter than my credit card. I knew that I was going to beat the trend and earn big rewards from my everyday purchases. I was wrong, and being wrong in this game can cost a lot. Going forward, R and I will plan for our future keeping in mind that the unexpected will happen, and that we will make mistakes. For us that means saving cash in the first place, not trying to get it back from our credit cards. The points aren’t worth it, especially when they end up on Discover’s side of the scoreboard anyway.