How to Escape Reward Card Spending Traps
I've talked before about how rewards cards are created specifically to make even the most frugal of card-holders take on debt. Our brains are wired so that even a little incentive to spend (like getting 1% cash back or a few airline miles) will make us decide to buy something we would otherwise leave at the store. While some super-savvy card-holders are able to make a lucrative game of rewards cards, the majority of us neither have the time nor the inclination to play the system, which is the very reason why these rewards cards are so prevalent.
For those of us mere mortals who will never make a living by milking rewards cards for all they're worth, it is still possible to stay out of the traps that these cards represent. The key is keeping purchases to a minimum and always paying off the credit card bill each and every month. Those two behaviors will ensure that you keep every penny of the (admittedly modest) rewards you earn, rather than seeing them burnt up in interest payments.
Of course, doing those two things are easier said than done. Here are four tricks you can use to make sure you stay on top of your rewards card. (See also: Which Type of Rewards Card Is Right for You?)
1. Pay Attention!
Rewards cards count on consumer psychology to earn profits. In particular, rewards card issuers know that people are inattentive and unlikely to keep careful track of each purchase. Our inattention is the reason anyone can feel surprised by a large credit card bill at the end of the month — “Surely I didn't spend that much!”— and it is much easier to lose track of our credit card spending than it is to do so with cash.
That's why it's imperative to know how much you owe your credit card at any point in time during the month. If you budget $600 for your credit card purchase every month, you need to know when you've reached $585 — long before your receive your statement. (And frankly, your statement should only be telling you information you already know.) There are several ways of paying closer attention to your spending:
Keep a Credit Card Journal
Adam Baker of Man vs. Debt suggests carrying around pencil and paper and jotting down the amount and purpose of each purchase you make at the moment of the sale. Once every couple of days, go through the journal to total up your numbers and see where you stand. It may feel awkward or be kind of a PITA when you first start doing this, but it can quickly become a habit.
When I first got a credit card in college, I held onto all of my receipts in my wallet and used them to double check the itemized purchases on each of my statements. (Yes, I have always been a money nerd.) If writing down your purchases is too difficult, then start stashing your receipts in your wallet (or, if you really want to go OCD, in a coupon organizer). Then, at least once a week, add up all of your receipts to know how much you owe.
Use a Money Management Website Like Mint
If the idea of dealing with that many receipts has you breaking out in hives, sites like Mint will take care of adding up your credit card purchases for you. Just be sure to log in at least once a week to see the numbers.
For all three of these options, schedule a time on the calendar for when you will do your weekly addition — and stick to it. You can't keep your spending in check if you don't know how much you've already spent each month.
2. But Keep Yourself in the Dark About the Rewards for Various Categories
Human beings tend to very selectively pay attention. It may be difficult to remember exactly how much you owe your credit card at any particular point in the month, but many rewards card-holders know exactly how much cash back they earn in various spending categories. And that's precisely what the credit card issuers want. If you're focused on how much cash back you'll earn by having brunch — “and why yes, I will have a fourth mimosa” — then you're going to feel good about spending money you might not be able to afford. Not to mention being a bit tipsy.
The trick is to only use your credit card when you want or need to, rather than being tempted to spend because of the reward. An important way to reduce temptation is to opt out of all advertising correspondence from your issuer. Not receiving the information from the source will help you to stick your budget rather than let yourself be tempted by a temporary spending category percentage hike.
The other part of this is deciding ahead of time exactly what you will use your credit card for. For example, you may have gotten your credit card for online purchases and rental cars, even though you generally pay cash in person. Getting 3% cash back for groceries or restaurant dining might make you rethink your credit card plan, but it truly shouldn't. Use your credit card only for the reasons you need it, even if it means your rewards are much more modest. Better modest rewards than crippling interest.
3. Open a Second Checking Account
One way to make certain you have all the money you need to pay your bill at the end of the month is through a second, dedicated checking account. Open a free checking account (one of the truly free ones that does not require you keep a minimum balance) and plan on using that account for paying your credit card bill. Each week, when you go over your credit card journal, your receipts, or your Mint account, transfer the amount you owe into your dedicated checking account. By the end of the month, you will have the full amount of your balance already set aside.
4. Pay Your Bill Weekly Instead of Monthly
While this trick would never have been possible back in the bad old days of paper statements, it's a great method for staying on top of both your spending and your balance in the new millennium. Basically, plan on logging into your credit card account once a week — say every Friday — and paying off whatever it is that you have charged as of that time. Not only will you not be stuck with a large bill at the end of the billing cycle, but you will also never be adding new charges to a large balance that you have not yet paid off. You will always remain current with whatever you have charged.
This method has an added benefit of helping to remind you of just how much you have spent. The same individual who budgets $600 a month for credit card spending might be horrified to see that they spent $300 in the first week of the month and will be much more careful with their credit card for the next three weeks.
The Bottom Line
Making sure you get the most out of your rewards card spending is all about developing financially-savvy habits. Your card issuer is counting on you to be forgetful and to get in over your head. But getting in the habit of regularly checking on your balance and setting aside the money you need for your bill will leave you with no interest, and a pile of credit-card funded rewards. That's a pretty sweet place to be.