Credit Card Debtors are Chasing Rewards (7:58)
But overspending for points or cash quickly becomes futile when interest charges kick in
Broadcast Retirement Network’s Jeffrey Snyder discusses balancing credit rewards and credit card debt with Bankrate’s Ted Rossman.
Jeffrey Snyder, Broadcast Retirement Network
This morning on BRN, credit card debtors are chasing rewards. Joining me now to help break it all down, Ted Rossman is with Bankrate. Ted, always great to see you.
Thanks for joining us in the program this morning.
Ted Rossman, Bankrate
Good to be here, thank you.
Jeffrey Snyder, Broadcast Retirement Network
So Ted, I got to tell you, I looked at the story that we’re going to talk about today and it just got me thinking that maybe some of these credit card users are chasing the wrong thing. They’re chasing their tail when it comes to rewards versus managing their credit card debt. But I want to get your reaction.
Ted Rossman, Bankrate
That’s absolutely right. Yeah, credit card rewards are great if you’re avoiding interest. That’s the key.
Our survey found that 72% of people with credit card debt are pursuing rewards. The reason that’s a mistake is the average credit card charges about 20%. And a typical rewards payout is often something like 1% or 2% or 3% cash back or airline miles.
Maybe you get a little better than that in certain categories with the right cards, but your overall blended return is probably around 2%. So great if you’re paying in full and avoiding interest, not great if you’re paying 20% or more for the privilege.
Jeffrey Snyder, Broadcast Retirement Network
Why the mindset? I mean, maybe they signed up for these cards for rewards and they’re so conditioned. It’s almost like a game.
I’m wearing an Apple Watch. I use it to kind of gamify my working out. Is it like that, that we’ve kind of gamified rewards and people are willing to put aside their debt, their debt concerns and the interest rate they’re paying versus getting those rewards?
Ted Rossman, Bankrate
It’s probably two things. One is just this siren song of rewards and everybody wanting something for free. And it’s great to get cash back and it’s great to get free trips.
And as I said, though, it’s not free if you’re paying a hefty amount of interest. So that’s a mistake people make. The other thing is maybe they have the best intentions that they’re going to pay it off and then something pops up.
And look, no shame. I mean, a lot of people have credit card debt for practical reasons. 44% of cardholders carry debt from month to month.
The number one cause is an emergency expense, some kind of unexpected medical bill or car repair or something like that. The second biggest answer is just day-to-day expenses. Things like groceries and other daily expenses outpacing your paycheck.
So I do empathize with that, but we have to get the math right. You’re digging the hole deeper if you’re paying a hefty interest rate to get rewards. You know, there are some other debt payoff strategies that I would recommend following first and then chase rewards once you’re debt free.
Jeffrey Snyder, Broadcast Retirement Network
Yeah. And we’ll talk about debt in our second part of our discussion. But I want to go back.
The rewards from, you know, I used to have a United. I still have the United card, but I don’t really fly often and I would get rewards. But a lot of these rewards, Ted, they have a shelf life.
I mean, they’re not sitting on the books. They’re a liability on the balance sheet, theoretically, for the company, whether it’s an airline, whether it’s, you know, buying groceries or gasoline, right? So there’s usually a shelf life.
So that kind of compounds in my mind, at least if I’m right, that compounds the problem because you’re getting something that really you can’t cash it in for cash. It’s not tangible. It’s going to go away if you don’t use it or lose it.
Ted Rossman, Bankrate
I agree. There’s sort of two layers to this as well. One is just outright expiration dates, which sometimes exist.
Certain airline and hotel programs, those points and miles will expire sometimes if you don’t use them in a year or two. The bigger problem, which affects everybody, is devaluation. We see this even on cash back cards where inflation cuts into the value.
The longer you sit on your rewards, the less they’re worth. It directly happens in the travel world where sometimes it’s 25,000 miles this year, let’s say, to get a free flight. And then maybe next year they change the program and now it’s 30,000 or 35 or same thing with hotels.
These are currencies, basically, and the providers do play with the value. And sadly, it’s not usually in the consumer’s favor. Usually there are these kind of devaluation steps that just make it harder to get a free trip.
So I’m not to say that they’re not valuable because there is real value in these programs, but you don’t want to hoard rewards. That’s another mistake that people make. It’s better to earn and burn strategically.
You want to actually use these. It’s not like your 401k. You don’t want to amass millions and millions of points.
You want to actually use them periodically when it makes sense.
Jeffrey Snyder, Broadcast Retirement Network
Yeah. Ted, you ever see the movie Up in the Air with George Clooney? Yeah, I love that one.
So you just got me thinking about… Remember, he was trying to maximize his per diem that he was getting every day. He was on the road 350 or 360 or 355 days and he got the million miles.
But at the end of the day, he looked back and I think the character at least had some pause. Ted, is there a financial literacy component to this? Because I feel like…
Forgetting the debt for a second. I’m just talking about the value of something because you made the comment about currency. There are some countries that don’t float their currency.
Whole nother issue. Maybe that’s a tariff conversation, perhaps. But is this part of a broader financial literacy conversation?
And by the way, Ted, April is financial literacy month.
Ted Rossman, Bankrate
That’s a really important topic. I really wish this was taught more in schools and at home. And it’s uncomfortable for a lot of people to talk about money.
But we do need to normalize that and get that out there. Yeah, there is potentially a financial literacy component if you don’t realize, maybe. A lot of people don’t even know what their credit card rate is.
And the average is 20%, but a lot of people are paying even more than that. So you really need to get a handle on this. Part of why it’s so important is credit card debt is likely your highest cost debt by a wide margin.
So for rewards to be worth it, you have to avoid interest and you have to avoid overspending, too. That’s another issue. There’s been some really interesting behavioral research that shows that there’s less friction when we pay with a card or an app.
And it makes sense because when you’re forking over hard-earned bills and coins, you feel more pain associated with that. Sometimes people overspend online or just by using their cards because they don’t feel it as tangibly. So that’s another thing.
We’ve talked about not paying interest. You also want to make sure that you’re sticking to your budget. Now, rewards are worth it if you do those two things.
If you only spend what you would have spent anyway, and if you avoid interest, maybe start small. Maybe just stick with your grocery bill or some other recurring expenses. If you put necessities on a card and pay it off right away, that’s when you can come out ahead.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I just think it’s about price. Well, I mean, I agree with you. I’m not disagreeing.
It’s about getting people to prioritize what is the most important thing so you’re not under the weight of debt. And we’re going to talk about that. Let’s conclude this part of our program, Ted.
We’re going to bring you back tomorrow and we’ll talk about managing credit card debt and pay down strategy. I think you’ll have a lot. I know you will have a lot to offer.
Ted, we’re going to leave it there. Great to see you. And we’ll bring you back on the program to discuss debt very soon.
Sounds good. Thanks. And don’t forget to subscribe to our daily newsletter, The Morning Pulse, for all the news in one place.
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Until then, I’m Jeff Snyder. Stay safe, keep on saving, and don’t forget, roll with the changes.