Word to the Wise – Don’t Carry a Credit Card Balance!

Credit cards are wonderful. I love them very much. They have earned me an exorbitant amount of points and miles that have allowed me and my wife to travel the world at a level of luxury that we would never otherwise be able to afford.

While this has been my experience with credit cards, many people do not hold the same fondness for their plastic pals – possibly because they are doing something you really shouldn’t do… carrying a credit card debt balance. This really is something that I cannot advise against enough, yet it seems to be happening more and more…

Per the Wall Street Journal – U.S. credit-card balances are on track to hit $1 trillion this year, as banks aggressively push their plastic and consumers grow more comfortable carrying debt.

While I am all for plastic, I am against carrying credit card debt, and you should be too… DO NOT DO IT!

Scream - AYP
My reaction to the thought of carrying a credit card balance…
Why Not, You Ask?

I have said it plenty of times already, but it is always worth repeating – credit card companies are in the business of making money! They make money each time you swipe (and now, insert, thanks to those little chip thingys), and they make money when you carry a balance from month to month. The interest rates on credit cards are some of the highest in the lending market, and this especially applies to rewards earning credit cards, where credit card companies attempt to offset the cost of those valuable rewards they offer with even higher interest rates!

There is absolutely no credit card on the market that can provide you with enough points or miles to justify carrying a credit card balance.

ABSOLUTELY NONE! 

Note: Some credit cards do feature low introductory APR (like the Chase Slate – 0% Introductory APR for 15 months on purchases and balance transfers), but they don’t typically feature strong rewards earning potential.

To illustrate the impact of high-interest rates on credit balances, I will utilize one of my favorite credit cards and point currencies – the Chase Sapphire Preferred and corresponding Chase Ultimate Rewards.

Exhibit A –

Sign-up bonus on the Chase Sapphire Preferred is 50,000 (+5,000 with an authorized user) Chase Ultimate Rewards points after meeting $4,000 in spending in the first 3 months.

You add an authorized user AND meet the $4,000 in spending in the FIRST MONTH – earning you a total of 59,000 Chase Ultimate Rewards – estimated value of $750 – $1250 (depending on how you utilize the points), but for this exercise, let’s assume $1,000 in rewards value.

That $4,000 in spending was a big chunk for one month, but no worries! You have savings to pay it off and plus, you just earned all those Chase Ultimate Rewards points and will be travelling the world in no time!

Uh oh… you just realize that you cannot afford to pay your balance in full – due to an emergency expense, like a roof leak or car repair – so you decide to pay the balance over time in $250 or $500 increments… and here is where it all goes sour:

The Interest Rate – This is where the credit card companies get you, charging ridiculous interest rates that compound daily.

CSP APR - AYP pOst

more fees detail - ayp
Note the MAXIMUM APR of 29.99%… YIKES!
Assuming no additional purchase on your Chase Sapphire Preferred after the $4,000 spent, and utilizing an APR percentage of 23% (this could be upwards of 29.99%), here is an estimated breakdown of how that repayment of $4,000 might go, and how much it will cost you… (Utilizing the Bankrate.com Credit Debt Calculator)

A. $500 Payment per Month (23% APR) (Estimation):

500 per month 23- AYP post

Net Earnings after Credit Card Debt Paydown:

$1,000 in Chase Ultimate Rewards, less $385 in Interest – Net Gain of $615 – meaning one-third of your value has been thrown away!

B. $250 Payment per Month (23% APR)(Estimation):

250 per month 23% - AYP

Net Earnings after Credit Card Debt Paydown:

$1,000 in Chase Ultimate Rewards, less $823 in Interest – Net Gain of $177 – hardly enough to fund any sort of meaningful travel!

C. Minimum Payment Only (23% APR)(Estimation):

min paymnet 23 - AYP

 

Net Earnings after Credit Card Debt Paydown:

$1,000 in Chase Ultimate Rewards, less $7,012 in Interest – Net Loss of $6,012 – this one is an extreme case of carrying a balance and is SERIOUSLY going to cost you!

A, B, and C – the Consensus is… Rewards Earnings Depleted!

Match - AYP
Carrying a Balance – a great way to “Burn” all you point and mile value!
If you routinely carry a credit card balance, playing the points game will cost you money and is a game that should consider watching from the sidelines until that practice changes. Consider a card that offers zero or low APR for the first 12-18 months, rather than a travel rewards credit card.

Final Thought

Don’t carry a balance. Treat your credit card as you would a debit card. Debit transactions are a direct deduction from your bank account and it is helpful to think of credit transactions the same way. And only spend what you can afford to pay at the end of the month, and DO NOT CARRY A BALANCE!

Conrad Koh SamuiPool - AYP
Up to your eyeballs in water at the Conrad Koh Samui > Up to your eyeballs in credit card debt!
The points and miles game can be a rewarding one if you just play it right and pay those credit card balances in full every month.

Happy Bill Paying!

DW


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