As many of you know, I am not a big proponent of credit cards because they cause over-spending and increase the risk of going into debt. Often though, I get asked the question, “What about the rewards credit cards that give you airline miles and cash back?” Well, a recent study conducted by the Federal Reserve Bank of Chicago found that cash-back credit cards prompt consumers to spend more and accrue more debt.
The study saw that, on average, the reward per month was usually $25 but that was accompanied by an increase in spending of $68 a month and an increase in debt of $115 a month. This is not really much of a surprise, because we tend to spend more using credit cards compared to cash because when we pay with plastic, we do not experience that “ouchie” moment when we spend with cash. This causes the “reward” to be not much of a reward at all and costs us more money in the end. Instead of trying to work the system for $25 a month (which is basically pizza money) there are other, cheaper alternatives.
Instead of using a credit card, use a debit card attached to a high yield checking account, and you will start earning some money without going into debt! To find a bank that is close to where you live try checkingfinder.com. You can find accounts that earn up to 3.50% on all your money, not just the purchases you make on your debit card. You just have to meet monthly attainable requirement and you can earn some money without going into debt!
To follow healthy financial habits this year, do not fall for the credit card reward trap. The only ones who win are the credit card companies, not you. Do you have any success stories about reward debit cards?