The Drivers of Rising Consumer Credit Card Debt

The Story Is Never Simple

I got a question from a subscriber recently asking about using credit cards to potentially get a “free lunch”...

“I’m an old timer financial advisor (77). Banks offer me credit cards with 0% interest rates for 12-15 months, 2-3% cash back, even 6% cash back groceries with Amex Blue, so I do everything with credit cards and pay off the balances before interest rates get jacked up. I’ve even bought stocks with 0% credit card debt.

Am I an isolated case or are there other people doing this, hence the rise of credit card consumer debt?”

To answer your question directly, no. You’re not an isolated case and there are plenty of people out there doing just what you’re doing (maybe not the buying stocks with a credit card thing though). I know plenty of people who use their credit card to pay for most things simply for the convenience factor if nothing else than carrying cash around all the time. They use credit cards merely as a payment tool and pay the balance of the card down every month. Since most credit cards have some type of reward feature attached to them, they collect the cash/points just for doing business. For them, they are essentially “getting paid” just for using the card.

That, of course, requires discipline. You can’t overspend your means and you need to pay off the balance in full every month. If you start carrying a balance, you’ll start paying interest fees, which can easily run 20-30% annualized. Depending on how much of a balance you’re carrying forward, that can quickly offset any rewards you may earn in the process. Even one month of interest expense at 24% will undo a year’s worth of 2% cash back rewards. A single slip-up can do long-lasting damage.

Since you sound like you’re one of those folks that pay off their balance every month, I don’t see any problem with collecting whatever bonus the card company is willing to give you!

But credit card companies don’t offer rewards programs out of the kindness of their hearts. In the end, they know they’re coming out ahead by offering cash back rewards because the interest and fees collected on credit card transactions and outstanding balances more than make up for whatever they’re paying out.