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Ask Dave

The Philosophy of Credit Card Use

Jim has an American Express credit card with no fee. He pays it off every month and receives 3% cash back. What's the issue with a credit card like that?

QUESTION: Jim in Los Angeles has an American Express credit card with no fee. He pays it off every month and receives 3% cash back. What’s the issue with a credit card like that?

ANSWER: Obviously, there’s not a major issue. You’re obviously in control of the thing. Any discussion we have is more philosophy than it is actual math in your case. But conceptually, here’s the problem. There are a couple of things. Number one, I don’t do any business with American Express because we have had to work with them, and they’re scum in how they treat their customers. They lie, and I’ve got no use for the company. That aside, the concept is still worth talking through with you. We see the underbelly, in other words.

The concept is two things. One is—and I’ve got a friend who makes a lot of money, and he uses his AmEx for everything and gets the cash back and gets the travel points and all that stuff—but I even watch this guy who’s very educated and pretty sophisticated in the handling of his money, and I watch him purchase things for $100 to get the $3 kickback. I always kind of cock my head sideways and go, “You just did that.” The motivation on the $100 spend was the $3 kick. That’s just wrong, you know? What that tells us is it’s motivating people to do things that they wouldn’t normally do because somewhere in the back of their head, they feel like they’re getting rich off this 3% kickback. That’s problem number one, and I’m not accusing you of that at great length no more than I am my friend. But I did stand there and watch him one day, and he turned around and smiled at me and goes, “I just made money.” And I’m like, “No, you just spent money. You netted a $97 hole here. You didn’t make money.” That’s like my wife saying, “I saved you a bunch of money today. I bought stuff on sale.” That’s just wrong.

Problem number two is anytime we use any kind of plastic—and I would extend this even to the debit card, which I carry—anytime you’re not using cold, hard cash with Uncle Benjamin looking up at you, you have a tendency to spend more. Now, you not so much, me not so much as maybe people who are completely out of control and disorganized with their money, but you’re obviously very conservative and disciplined and you do a great job with your money. Otherwise, you’d run this thing up and have a balance at some point. If you’re telling me the truth, this thing’s not screwed up your life versus other people that call this show, and they’re in the credit card up to their eyeballs. The point is you’ve obviously done at least a good enough job to where this thing’s not got the best of you. I’ll leave it at that.

You do have a tendency to be manipulated by the 3% to a degree—some people more than others—and you do have a tendency to spend more than you do with cash. I experienced this several years ago, and you’ve got to keep in mind I’m the guy that teaches this stuff, so I study how the behaviors are affected by the different method of payment, so it’s very interesting to me. I’ll tell you this is a fun discussion.

We went to Disney, and we stayed on property. Your room key is then good all through the park as a debit card charged back to your room. Well, crap, man, I’m buying $8 ice cream cones and not even realizing. I’m going, “I wouldn’t pay that for an ice cream cone anywhere else.” We’re just buying stuff like crazy, and I get back to the room and get the bill. Oh, my goodness! That’s when I realized. They also do it on cruise ships now if you’ve been on a cruise—your door key. They won’t take cash on a cruise, and they claim it’s to protect—not have cruise stealing or whatever and balance the books. No, it’s because you spend more. They know that.

Anytime you’re using plastic, you have a tendency to spend more across the board—especially when you’re using a credit card. To a lesser degree, an AmEx and to an even lesser degree than that a debit card because you know it’s coming out of your account that night. But, for instance, something on a little purchase, the National Federation of Vending Machines or whatever that association was, I read a study of theirs the other day that they’ve started taking cards at the vending machine. You walk down the hall of the hotel, right? There was a 178% increase in sales by credit card users versus people who put real money in. We’re talking about 178% of a Coca-Cola, so we’re talking about a Coca-Cola and a bag of chips, right? They double their sales, basically, and almost triple them with that. People buy more when they do that because it doesn’t activate the pain centers of the brain when you use plastic. You don’t feel spending emotionally like you do when you use cash. That's the theoretical or philosophical discussion.

Those are things for you to beware of if you’re going to continue down this track. I don’t carry an AmEx card for other reasons as earlier stated and because I use a debit card and it does everything I want it to do.

When we have all crashed to the point that the color of our plastic establishes our status, we’re screwed.

It’s a fun discussion to have, Jim, but in your case, I’m not going to say, “Dude, you’re crazy! You’re losing your mind! You’re stupid!” You’re not. It’s not going to bankrupt you. Were I in your shoes, I would cut it up and get a debit card. We know that because that’s what I’ve done. I don’t have a credit card. Because you’ve proven yourself to not be destroyed by the thing and I’ve given you the reasons why it’s not a good idea, but they’re not reasons that are going to cause you to ruin your life in your case.

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