How can you travel for free? You cannot.
As much as I look up to many financial gurus, it sickens me how some of them suggest that you can travel for free using plastic. The idea behind free travel is that you use your card and the credit card company provides you with points or miles that you can use for travel. This method has many names and particular protocols: credit churning, point collecting, credit rewards. I think we should instead settle on one name: delusion.
The Basic Delusion
So here are the basics of how people suggest swiping is a way to travel for free. You swipe your card. Then the merchant runs it through a program designed by programmers, the company handles the bills, transfers the money for you, then they provide you with free points and miles for you to spend. Remind me which of those things you would do for free. Would you make a program to handle money for free? Handle other peoples bills for free? Move money around for free? And on top of that you would give people essentially free money? No one short of insane would do any of those, much less all four.
And here is the thing, credit card companies are one of the highest earning companies in the world. How do they make that much money when they provide you all those free services and free money? It is just incredible (extreme sarcasm notice).
Credit card companies in 2016 alone made $163 billion providing people with those free services and money. Here is the breakdown of where that money came from according to R. K. Hammer.
Interest Income: $63.4 billion
Interchange Income: $42.4 billion
Cash advance fees: $26.6 billion
Annual fees: $12.5 billion
Penalty fees: $12 billion
Enhancement income: $6.3 billion
The Delusion Goes Further: Added Costs To Business
Many see this list and only pay attention to the interest, annual fees, cash advance fees, and penalty fees as they are only fees for being late on a payment or by not paying off the monthly balance. Some say they are smart enough to “beat the system” and that they will pay their balances on time and avoid these fees or that they have a card that charges no annual fee. Good for you, if you actually can, now what about interchange income? Well what is interchange income? Interchange income is the income from fees involved in transferring money to and from the card-issuer’s bank. In other words, it’s the cost per swipe.
That is not the worst of it. Research shows that people spend more with a credit card than with cash. One of the reasons for this is that using cash actually signals pain while using cards do not. You actually feel like something is being taken from you in an interchange when you use cash, not with a card. Even if the merchants do not need to increase their prices to use cards, the extra amount that card users spend compared to their cash users more than make up for it.
They Make You Spend Even More
So what? Do credit card companies feel bad that they provide rewards to their loyal customers? No, research shows that the rewards are designed to win new customers and to encourage consumers to purchase more, not to allow you to travel for free. I know people always say “I will only spend it on things I actually need, nothing more.” But I have also heard these exact people say shortly after “I know I didn’t need it, but it paid for my vacation.” So I all but promise you, you have not obtained rewards by spending on only what you need.
Altogether, the rewards on cards are only a ploy to encourage people to spend more and for credit card companies to make more money. A paper published in Federal Reserve Bank of Chicago showed that the average debt of regular credit cards to reward cards increases from $79/month to $191/month for $25 worth of points. That is an increase in $112/month in debt for $25 (not a good trade).
Are Credit Card Issuers Evil?
No, they are not. They are sneaky when it comes to trying to make a profit off people. But it can be argued that they are providing people something good. They are even sneakier though, they push legislation to prevent negotiations to lower interchange fees.
Also, credit cards can be excellent tools. Try purchasing anything online without a card or some other middle man. People will have to transfer and handle money for you and the companies, which will cost money, therefore interchange fees can be expected. Furthermore, even using cash requires some cost in interchange. My wife said her work has to pay for interchange of cash via armored cars and many other interchanges. In other words, exchange of money always requires labor and resources, which requires payment. For instance, let’s say that everyone stopped using cards at the gas pump, that would require more people to work at registers and likely more space for those registers to accommodate for all the cash interchanges.
In addition, credit cards are still an excellent way to build credit. I know people think this is a necessary evil, and I sometimes do myself. But, let’s say we need to borrow money without credit reports from credit cards, we would have to find other ways to show that we are good at paying back our debts. Credit cards are a simple alternative. That alone makes a interchange fee from time to time worthwhile, but they are not a way to travel for free.
What Should We Do Instead?
Currently, many retail companies are trying to lobby to negotiate these fees, and not a moment too soon. Cashless retail is popping up, which can change the dynamics of the economy. Here is my question: why wait for them or the government to change this? We can try to minimize these fees ourselves. Cash and cards are within full control of the users.
Where should we start? Well, I say you should use cash for more in-person purchases. This will show merchants that they do not need to use cards as often, nor pay the higher interchange fees or for the programs to use those cards. This may force card-issuers to re-negotiate their fees, which may open competition between card-issuers and other types of money interchanging systems. Inevitably, whichever way is best to exchange money in business, whether it is cash or plastic, will be determined by the economy. Cards will still have a place in the economy and card-issuers can still make a profit.
I know I made a post suggesting how to travel for free into a post showing the facade of credit rewards programs. However, I believe understanding the facade of reward points and credit card use can help you forge your wealth by preventing you from going in debt just for a carrot.
I know I am offending many individuals, but I believe I started this blog saying I would be more like a trainer, which means that I will be tough from time to time. Furthermore, the idea of over spending on credit cards has sunk so deep into culture the culture has sunken even further in debt. As if that is not enough, by using credit cards too much we may have increased the cost of living for many without knowing about it. MAY HAVE.
Credit cards and plastic belong in our economy, especially in eCommerce and long distance interchanging of money. But it is too saturated in other areas of the economy thanks to the advertising and legislative campaigns the card-issuers commenced. Note, I did say these were the delusions of using rewards cards, not the evils. I believe we can reverse all the effects of these campaigns best in a free market, not by multi-billion dollar companies, and certainly not by our government. This post is not just supposed to be informative, but inspirational.
I encourage everyone to share this post with someone you feel close to. Do not force the idea of using only cash, but let them know the possible penalties of using only credit cards and let them decide for themselves. If we can control the use of credit cards in this plastic nation, maybe we can start undoing the damage caused and start leaning plastic away from a shackle and more towards a beneficial tool. This is an inspiration to share how to forge everyone’s wealth not just yours.