Credit Card Float & Rewards Programs are Dangerous

A few years back after getting my first rewards credit card while I was in college, I started playing a dangerous game – the credit card rewards game. I’m sure you’re all familiar with how nice the rewards can be if played correctly, but this game also has often-overlooked psychological hurdles, and people consistently tripping over those hurdles is exactly how the credit card companies can afford to give out “rewards” in the first place. I openly brag about the rewards I accrue using my credit cards now, but when I first started out, I occasionally tripped on the hurdles like everyone else.  It takes a bit of pre-planning & self control in order to not trip, but it’s very satisfying to actually come out a winner when it’s done right.

How “Float” is Dangerous

Keeping a credit card balance makes it more difficult to keep a clear mental accounting of your real “available” funds. Many people only go as far as to glance at their current checking account balance when determining if they can afford to splurge a little bit – and if you have a balance on your credit card, you may forget to subtract that already-spent money off of your current balance. You may have forgotten the $200 in clothes from last week’s shopping spree that went on your Discover card, and therefore you feel great about spending $40 on a dinner out: it looks like you have $200 more than you actually have.

For me, my most memorable blunder was putting a vacation on my credit card with the intent to pay it off the next month – of course, this didn’t work out as planned.

With a traditional checking account, people are taught to keep a register that reflects their actual balance after all pending items clear the account – with a credit card, this is no longer a part of the accounting process for most people, and the statement at the end of the month can be a big surprise. If the same money was spent more than once because of on-the-fly accounting mistakes, you end up spending too much and often carry a balance and pay interest for the privilege.

How Credit Card Rewards Programs are Dangerous

Credit card rewards alone can also be dangerous, because they really do encourage more spending. When you’re attempting to reach a minimum spend requirement to “earn” a big bonus reward, or you want to save up as many airline miles as possible, there’s always a little devil on your shoulder that says, “go ahead and buy it, it’s earning me reward points!” – it’s gamifying the act of swiping your card, and it’s a powerful psychological trick that the credit card companies have mastered.

For instance, my current card will give me an awesome $400 bonus if I can put $3,000 worth of spend on it in the first 3 months; my credit card spending usually isn’t anywhere near $1,000/month, so I am tempted to increase my normal spending to reach the total spend required in time to earn the bonus.

Just this evening, I received an email from Discover trying to encourage me to use my card more often – for every swipe I’ll be entered into a sweepstakes with big prizes; more incentive to spend more often.

If you follow the little devil’s advice, you’re tumbling down an incredibly slippery slope, because in reality a tiny reward only worth 1-5% of your purchase (or a miniscule chance at winning a sweepstakes) is a horrible justification for spending money that would otherwise not be spent. Really, if you find you’re susceptible to this type of trickery, you might want to avoid the credit card rewards game altogether.

How to Win

Coming out ahead in the credit card rewards game requires discipline as well as an advanced level of anti-consumerism zen.

To avoid the “float” problem, I do two things:

  • Keep a budget & track my real-time expenses (including credit card purchases) using & YNAB. Even if I notice a surplus of cash in my checking account, I am looking at my budgets and not my balance to determine if anything will be spent.
  • Pay my credit card balances weekly. Despite using my budgets & natural knack for frugality to make purchasing decisions, it is still helpful to keep a “real” checking account balance in my head. For this reason, I like to pay my credit card regularly, so the disparity caused by float is always relatively small.

To avoid the psychological warfare of participating in credit card reward programs, I just remember my big picture goals: sometimes it’d be nice to spend money on “stuff” and earn more rewards in the process, but I know that I want to be financially independent in 12 years, and I am sticking to my guns to reach that goal. I also know that buying more things will not actually, truly, make me happy.

Frivolous spending driven by consumerist culture just doesn’t fit into my life. My credit card rewards can be maximized by funneling my pre-planned and regular spending onto credit cards (utility payments, groceries, gas, etc.), and I can easily avoid signing up for cards that have unrealistic minimum spend requirements on their bonuses.

Let me know if and how you use credit card rewards programs in the comments!

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