It would be easy to criticize credit card companies because of their aggressive marketing policies and resulting debt problems, but the truth of the matter is that the credit card companies did not put a gun to the consumers’ head and told them to buy something.

Credit card companies are very manipulative of the populace on working to get them hooked on debt; but at the same time people have taken the attitude that it is the credit card companies fault that they are in debt.

No one gets out of debt until they take personal responsibility for getting their. Once a person is fully responsible for their actions, then they should leverage the benefits and advantages that credit cards offer as described in this great article.

I would like to briefly address the rewards portion with one point I did not see brought up: merchant fees.

Merchant fees or “interchange fees” are the amounts that credit card companies charge the merchant for the benefit of accepting cards at their places of business. Those fees are higher in the U.S. than in any other country in the world and currently take $2 of every $100 spent by consumers… whether they use cash, debit, or credit. Why? Because the merchants pass the fees on to us to cover the cost.

Credit card companies disallow merchants to inform their customers of these charges at the point of sale. The also disallow them to require a minimum amount per purchase for use of credit, although some merchants do it anyway because they cannot afford the fees & do not want to continually raise the prices on their customers.

So who is really winning with rewards? If the credit card companies did not prosper from promoting their use, then they would not promote them.

I am not saying that rewards will not put a little extra money in your wallet… but rather shedding a little light from a different perspective.

So if Financial Samurai is getting $300 – $500 cash back from 1% of purchases that would equal roughly $40,000 a year in credit card spending. Even on the low end that may mean he is spending $8,000 per year more than if he paid with cash.

To me that is a expensive way to get extended warranty and charge back privileges.

Nicely written post.

Thanks,

Matt

1% and you earn $300-500? Nice, you DO put everything on that card!

@ Jon –

In regards to the warranty, from my research it is much more common for credit cards to have warranties. Some debit cards may offer this protection too, though. Thanks for pointing that out.

However, the chargeback protection is completely different as I mentioned in the article. All credit cards are offered this protection as part of the Fair Credit Billing Act. However, most debit cards have been extended this privilege via Visa and Mastercard as long as you, as you mentioned, choose the “credit” option. There is a key difference between the two chargebacks: With a credit card, you do not have to make the payment while the affidavit is being sent out and the issue is being resolved. With a debit card, the money is taken out of your checking account and you have to wait to get YOUR money back.

That may not be a big deal on a $20 item, but it can cause issues when you are waiting for your debit card to issue you $1,000 back for your laptop you purchased from Best Buy that was actually a box of paper mache. With a credit card, you wouldn’t have to worry about a thing… you never outlayed the $1,000 to begin with.

My year long home rebate program for my card went through this past august. Although it’s only 1% for all purchases, it ads up to about $300-500/yr that goes towards paying down principle.