Question: I think I have around $9,000 or $12,000 on something like six or seven credit cards. My girlfriend thinks this is a national emergency or something, even though I got so many points that I got us upgraded to first class for nothing when we flew to Houston to see a World Series game and got a better hotel room, too.
Can you tell her this is how the rewards game works? You got to spend money to make money, right? I love this woman, but she drives me crazy with her old-school outlook on money.
— Devon in California
Howard Dvorkin answers…
I’m sorry, Devon. You’ve come to the wrong place to dismiss “the old school.” I embrace bleeding-edge technology and creativity on many topics, but when it comes to debt, I’m downright medieval.
I controversially wrote a book that declared…
Learning to live without a credit card is an integral part of financial empowerment. If you don’t use credit cards, you will begin to take your money more seriously. The act of physically handing over dollars and cents to a cashier or waitress generates a feeling of loss. That money is gone. When you hand over a credit card, you can worry about that bill later — or you might not think about it at all.
Let me break down your situation, Devon.
First, it’s been proven many times over: Rewards points don’t eclipse credit card debt. In other words, it’s not worth the points if you’re carrying a balance.
The average credit card is charging around 15 percent interest. The average reward point is worth between one and two cents. That math doesn’t work in your favor.
Think about it this way: Credit card companies aren’t in business to lose money. If they offer you a freebie, it’s because they know they can make it back — and then some.
Those credit card companies realized long ago that many customers will be lured to their rewards program but still carry hefty balances that will more than make up the difference.
Devon, you mention the term “spend money to make money.” As a business owner myself, I agree with that concept. However, that’s not the case when it comes to personal debt. The term applies to expanding your business so you can earn more than you’ve spent. It often involves borrowing, but it a very calculated way — and at risk to the company, not your personal savings.
I implore you to look beyond the rewards you’ve won. Instead, look at the interest rates you’re paying. Do the math. One sign that you’re not being prudent: You’re not even sure how much debt you have on how many cards. If you don’t know those numbers, how can you be so sure you’re making more than you’re spending?
Finally, I implore you to listen to your girlfriend. From what little I know, she sounds wonderful.
Have a debt question?
Email your question to email@example.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.
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