No Debt Plan

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Thanks to our American Express Blue Cash Card, we’ve earned $327 in cash back so far this card year. The card year is dependent on when you signed up for the card, so ours runs August-July. Last year we earned over $430 just by using our card as we would a debit card.

This is why I believe in credit cards. They are a tool. They can be misused.

We don’t pay an annual fee. We don’t carry a balance. And we get cash back from 1-5%.

But you tell me… would you like to have essentially a free $327?

I think we all would. Feel free to correct me.

I’m a big fan of credit cards. That’s been hashed out here before. I love getting paid for my normal shopping habits. I love my AMEX Blue Cash rewards. I love how I am protected if the card is stolen. No one is emptying my bank account tonight; at least not because of my credit card (I wouldn’t get this protection from my debit card.)

Yet there is one thing that just baffles me: why pay an annual fee?

Credit card companies offer two different types of cards. The first requires you to pay to use the card on an annual basis. These fees can range from $29 to more than $99. Of course the second type of card lets you use it without charging an annual fee. There are a multitude of no annual fee cards available. So why pay an annual fee?

I haven’t heard a solid argument yet. So drop the annual fee card and pick up a credit card (to use wisely) with a great rewards program.

These are some cards I would recommend. They carry no annual fee and have a decent rewards program:

AMEX Blue Cash (My personal favorite because you can earn up to 5% cash back. I think cash is better than any of the other rewards because you can spend it on hotels, air fares, or whatever else you want.)

Discover (Very similar rewards to AMEX Blue Cash.)

AMEX Clear (Blue Cash has a better rewards program)

AMEX Blue Sky (if you prefer your rewards for flying)

Chase Free Cash (1% cash back)

So there are some options for you. Stop paying an annual fee and enjoy some rewards to boot. I know American Express also has some very low balance transfer fees in the range of 4.99% to 5.99%. Transfer some of your high credit card debt, pay it off, and then chalk up the rewards.

We use our credit cards for every purchase that we possibly can. As I’ve said in the past, credit cards are not evil.

We got several mailers today from American Express encouraging us to spend our money with them. One was showing off a new tool they have for Blue Cash users that lets you track how much money you have spent on the card. This is important for the Blue Cash because rewards are based off one of two tiers. The more you spend, the higher the cash back percentage. The new tool is called the Cash Back Tracker.

The Good

The Cash Back Tracker is actually a pretty nice tool. You can track how much you’ve spent and earned for the current year, as well as what you earned last year in rewards.

As you can see from the image, we’ve earned $279 in cash back thus far this year on $16,819 worth of spending. That comes out to 1.66% overall cash back. In comparison, we earned $432.15 year ending July 2007. That was a big year — we got married and charged everything associated with it and our honeymoon.

The Bad

Unfortunately, AMEX wants to encourage me to spend even more money with them in the hopes I will carry a balance they can charge interest on. To that end, they let you set a rewards goal for the year. I could let them know I want to earn $500 in cash back. To earn that, of course, I’ve got to spend, spend, spend. This may seem innocent enough because it could be used just to show me what I’ve got to spend to get to that goal. I just don’t think it is too innocent.

Conclusion

The important piece for us is we are earning a couple of hundred dollars each year for free. We pay off the balance every month, and in turn get rewarded for it. Some others, like Free Money Finance, are earning more than 2% from multiple cards. We’re content with what we are currently earning because it keeps it simple. We don’t juggle ten different cards to get the highest return. I love paying our utilities with the card to earn a return on money I would have spent regardless. Sounds like a win-win to me. The tracker is quite handy because I can see how much we are earning in an up to date format.

As always, be careful. Don’t go spending just to earn a small percentage back in rewards. Use your credit card like a debit card.

Many of you will disagree with this sentiment, but hear me out.

Credit card companies do not generally have your best interests in mind. They want you to charge as much as possible, and take your time paying off the balance. A $10,000 credit card balance, at a 14% interest rate, with a $125/month payment will take you 229 months to pay off. That is more than 19 years. Oof!

As cash hungry as those credit card companies are, they do not pay evil henchmen to run around the United States and hold guns to consumers’ heads. Debt that is racked up on credit cards is voluntary. You picked up the card. You went to the store. You swiped it at the register. Take some personal responsibility.

Granted, the card companies try to appeal to every one of your impulses to get you to use the card. “It’s easy!” “You can pay it off later!” “Come on, it’s just this one time…” Mailer after mailer ends up at your house, full of pre-approved offers. They see it as trying to win your business. We all know they are trying to entice you into a never ending cycle.

Despite all of this, I love our two credit cards. Here’s why.

• A credit card is a tool. Other controversial items — guns, for example — have the same stigma. The credit card does not charge purchases on its own. A gun does not pull the trigger. Both are risky tools. With risk, comes responsibility. Used wisely, credit cards are a beneficial tool to have in your wallet. (For the record, I am not a fan of guns, and do not own one. I know the risk, and have made the choice against it. Credit cards can be viewed the same way. Nor am I saying they are on the same level — just making a comparison here.)
• Rewards. From August 2006 to July 2007, I earned $432 in cash back rewards with my American Express Blue Cash card. Some will argue that the risk is not worth the reward; I’ll tackle this in a future post. Yet, I’m not going to argue when I earn $400+ for simply paying my bills as I would normally.
• Purchase Protection. There are always catches, but for the most part anything I charge on my AMEX is covered. If someone on eBay rips me off, I don’t pay a dime. I use the card heavily (i.e. I make them a lot of money), so most small charges can simply become a write off for the card company. I have only had to use this protection once when I ordered a gift for my Mom from an online store that never shipped it out.
• No interest paid. We pay off the statement balance at the end of every month. Result? I’ve never paid interest on my cards. We use the cards just like they were cash.
• I don’t spend more than I would otherwise. This is the real kicker, even for people who pay off the balance at the end of every month. The common rant against credit cards is you typically charge 12-18% more than you would if you paid cash. We simply don’t do this thanks to our budget. More on budgeting later, but if you truly stick to the budget it is not possible for you to spend more than you would otherwise.
• One Payment. Well, a handful of payments. As I mentioned, we use our credit cards for almost everything including utilities, car and life insurance, groceries, and eating out. Rather than having to write a lot of checks during the month, all of those payments get bundled into two cards.
• Safer than a debit card. Some (Dave Ramsey) argue that debit cards are better than credit cards because you can’t spend more than what is in your account. This is true. If you simply can’t control your spending, don’t get a credit card. If you can, the credit card is a better option. If your debit card is stolen, all of your cash is at risk. You may get it back, but it can take a while for the bank to get everything sorted. If your credit card is stolen, your risk is limited to whatever stipulation is in your agreement. I think a common agreement is you pay nothing after the first $50 of unauthorized charges.
• Delayed Payment. This is a heavily marketed “benefit” of credit cards to consumers. Charge now, get the item now, but pay later. We always have the cash on hand to pay the bill, but get to hang on to it for a while. Thanks to ING (savings and checking), we earn at least 0.25-0.33% on those purchases each month. (3% on checking/12 = 0.25, 4% on savings/12= 0.33%). It isn’t much, but every little bit counts.

Do you use credit cards? Do you carry a balance? Do you get rewards? I am only a fan of cash back cards. Airline miles are only good on airlines. You can use cash on anything.