Could Dave Ramsey Actually be Wrong About Reward Credit Cards?
By Jon Mohatt
Ok, now that I have your attention I have to admit that in general I agree with Dave Ramsey in almost everything he says in regards to personal finance except for one area, credit cards, specifically reward credit cards. As you have found out in many of my past posts, I like to take advantage of lucrative credit card (CC) sign-on bonuses to accelerate my reward point accumulation. Dave is adamant about not using or even having CCs, a great strategy for those who lack self-control, but it is certainly not the best strategy for me and the many others that earn thousands of dollars in travel every year via reward points earned by using CCs. The use of CCs, when done properly, adds significantly to one’s travel budget and actually frees up income to pay off debts (if you have any), add to savings and increase investments.
Before I go any further, I think it is very important to lay out some ground rules that I follow and that you also need to follow if you feel you want to jump on the CC reward point’s band wagon. If done improperly, CCs can cost you thousands instead of earning you thousands. Here are my basic ground rules for using reward credit cards.
Reward Credit Card Ground Rules
1 – ALWAYS pay off your credit cards EVERY month
2 – See #1, it’s that important
3 – Don’t apply for credit cards if preparing to buy a home in the next 12-18 months
4 – Do not let credit card spending blow your monthly budget (You do have a budget, right?)
5 – Your credit score should be above 700 with 760 being a more preferable minimum
6 – Apply for credit cards in moderation!
7 – Keep your oldest, no annual fee, credit cards to help maintain a higher “average acct age”
These ground rules should make sense to you and I hope you understand why I have them, but some of the rules may need a bit more explanation. Rule #3 is because you do not want to risk having your credit score drop right before applying for a mortgage. One receives the best interest rates by having a credit score above 760 so that is why that is my preferred minimum in rule #5. Some studies indicate that one’s spending is 20% higher when using credit versus paying with cash or cash equivalents. I can see the merit in this finding and that is why one has to treat their CC as if they are using a debit card (I’ll explain how in a future post). In other words, anything bought with a CC comes right out of your account in the month spent and the total expenditures cannot exceed what you have set as your budget limit for that spend category. There is a lot that goes into this and it too, warrants its’ own post, but everyone should have a budget so you control your money and not the other way around. Rule #7, talks about one’s “credit history” which is a factor in calculating one’s credit score, so you want to keep it as high as possible. By maintaining some no annual fee CCs you have had open for many years it helps in keeping your average account age up as you add new CCs that will lower your average. At the end of the day only 15% of your credit score depends on credit history so one’s credit score only drops by a few points per new CC and tends to rebound quickly assuming all other aspects of your score are kept the same or improved.
Bottom line, if you can follow my rules above then you should ignore Dave’s advice to steer clear of credit cards and start earning the thousands that you have been missing. There are literally dozens of credit cards that offer great sign-on bonuses and the ability to continue earning points via your daily spend. I looked at my family’s credit card spend over the past year and if we had listened to Dave’s advice on credit cards (we listen in all other areas) we would have left, according to my point valuations, over $1,000 in points and cash back on the table just from our daily CC spend. We also earned over $2850 of points via sign-on bonuses. That equals roughly $4,000 that we have added to our travel budget just in the past year by using CCs. I’m sorry Dave, but I am not going to turn down a free $4,000. In reality, it was actually even more if I was to look at the value of the travel we were able to obtain versus just the raw calculation of point values using commonly used point values. Just look at what we were able to receive on our recent Disney World trip
If you are still not convinced that CC’s can be beneficial, let me give you an example of how we recently used our points to make a trip a reality for our daughter. A very popular travel award CC is the Chase Freedom Visa. Each quarter it identifies spend categories where one can earn 5X Ultimate Reward (UR) points for spend in that category up to $1500. That equates to an additional 30,000 (1500*4*5) UR points per year, enough for $375 in travel if redeemed on the UR portal which provides a 20% discount if you also have the Chase Sapphire or Ink CCs, which we do. By using the points we earned via these bonus categories and other daily spend we were able to collect the 35,000 UR points necessary for a ticket to Port Au Prince, Haiti. This ticket will allow my oldest daughter to go on a Missions trip via Mission of Hope. We truly feel that using our points to help others is a great use and one that will also enrich our daughter. By using points for my daughter’s travel we were then able to also send my wife so this will truly be a mother/daughter experience that will last a lifetime. Thank you points!
As always, happy brainstorming and safe travels! Be sure to sign up to be notified of future blogs posts (top of right sidebar) and let your friends know about this blog and it companion Facebook page.