Cash is Dead

The other day, I heard a commercial for the upcoming switch to 100% digital TV in February, 2009. Leading up to the pitch in the advertisement, the voiceover said “Everything’s better in digital, like your music, your pictures, and now even your TV". I found it rather odd that the ad didn’t mention anything about money.

You often hear proponents of the physical greenback making thoughtless statements like “You shouldn’t use credit cards – they’re too dangerous. If you don’t have the cash for it, don’t buy it”. Well, granny, I respectfully disagree.

The electronic currency movement will inevitably give cash its place in the history books and museums, next to the other exhibits of extinction. Aside from the obsessive-compulsive reasons to embrace electronic currency such as not having to handle a bill that 4,563 nose pickers, 67,858 uh “self pleasurers”, and 23,067 restroom non-hand-washers have previously had their hands on, there’s a better reason to ditch the coin, bills and checkbook and fully adopt the world of digital dollars.

The reason is simple – Rewards.

In my last article, I explained that the value of a point was roughly one cent – an almost universal standard across rewards programs. Yes, you can get a better value in many cases and, on the flip side, you can also get short-changed if you don’t choose your credit card account and rewards program wisely. Most rewards programs will give you a point per dollar on everything you spend with your card, and some extra points per dollar for “on-spend” purchases – that is, the brand that markets your card – such as the United Mileage Plus Chase Visa, which offers two points per dollar spent on eligible United Airlines purchases.

So, if credit card companies want to give you money back (again, roughly 1%) for everything you buy using their card product, why wouldn’t you do it? Regardless of how you pay for your purchases, be it cash, debit card or credit card, retailers price in the cost of accepting credit cards into everything they sell. And for a retailer, it ain’t cheap. This cost is called the interchange fee and, depending on the card association (VISA, MasterCard, Discover, American Express), that fee can be roughly anywhere between 2%-4% of the amount charged. Here’s how that fee income gets distributed, using the United Chase VISA I mentioned above, assuming a 2% fee as an example on a $100 purchase at Wal-Mart (disclaimer – The numbers below are for illustrative purposes only. I don’t claim to know anything about the specifics of the VISA/Chase/United contract):

1) VISA collects the $2 and gives the remaining $98 to Wal-Mart.

2) VISA gives the issuing bank (i.e. Chase) their cut. All deals are different, depending on the bank and the complexity/value of the rewards program. Let’s assume Chase collects $1.40 of the $2 that VISA collected.

3) Chase uses the $1.40 to fund the loyalty program – a penny per point – so $1.00 on a $100 purchase. Now, the issuing banks do factor in breakage – a bet that not all points will be redeemed, which means the banks actually spend less than a penny per point. (Breakage is not necessarily a good thing for a bank, as it’s an indication that their loyalty program isn’t resonating with their customers). Chase may pocket the breakage, or their contract with United may require them to share the breakage or pass it all back to United.

4) Out of the $0.40 that remains, a portion – let’s say $0.30 - is passed onto United for use of their brand.

5) The remaining $0.10 is kept by Chase and most likely gets used to fund the marketing of the loyalty program.

There you have it – that’s how roughly 2% of every dollar you spend gets filtered through the system. Every one of us is paying for the rewards programs that exist no matter how you pay for your products or services, whether it’s a stinkin’ pack of gum or a $2,000 replacement transmission.

So, ditch the paper and embrace the plastic. There are a few exceptions, like those contractors who want to charge you a 3% fee for using your credit card, or Uncle Sam who allows you to pay your tax bill on a credit card, again for a 3% fee. Using your card on these types of transactions makes no sense because you’d be spending 3% extra to get your 1% in rewards, so don’t do it. Also, I’d be remiss if I didn’t make any differentiation between debits and credit cards. Debit cards, while practical, do not generally offer rewards, so don’t use them.

Use a rewards credit card for everything you can – even some of your monthly bills can now be charged to a card. Then, at the end of the month, pay off your bill with all of the cash you didn’t spend. You’ll be getting the most for your money, and you’ll be keeping your hands very clean!

Cheers,

CardTuna

Vacation in Hawaii for four, just $20. Not possible you say?

I want to tell you about my recent rewards success story. But first, let me explain something. There are a few schools of thought around credit card rewards programs, and here they are:

1) It takes too long to rack up the points and are too much trouble

2) The points are good to have when one wants to get something that one might not otherwise purchase on one’s own

3) Points are another form of currency, to be spent as wisely as any other form of currency

Most rewards cardholders who spend a few hundred bucks a month on their cards likely fall into the first category. That’s because redemptions typically don’t begin until 2,500 points (for which one can usually just get a measly gift card). At a few hundred points a month, it can take years to earn a simple reward.

My pal GridMaster subscribes to the second point of view – racks his points up to buy that splurge item he wouldn’t otherwise consider (see “Watch Your Point Values When You Redeem” below).

But me – I subscribe to the third point of view and look at my points balance as if it were cash, and I weigh my redemption options with the same level of care that I choose to spend my hard-earned coin.

As a result, I recently struck the “deal of a century”. I redeemed 270,000 points from my hotel rewards program for a full week at a category 7 (i.e. top notch) hotel and three tickets (non-stop) to Hawaii.

My rewards program allowed me to take 120,000 points (included in the 270,000 points) and deposit it into the airline frequent flyer program of my choice (this is not typical - usually 120,000 airline miles would cost close to 250,000 miles alone, but my rewards program offered a great hotel/air combo deal). So, I chose the airline account that had a 30,000 mile balance – that gave me 150,000 points – more than enough for 4 round-trip tickets – all I had to pay was $5 a pop for my online booking fee. As a result, I’ve got a full week in Hawaii with airfare for just $20!

I figured this was the best value I could get for my points – here’s how it breaks down:

7 nights at the JW Marriott in Oahu – normal room rate = $440/night including tax. Total value = $3,080. Point cost = 150,000. $ value per point = $0.0205

3 round trip tickets (from points) = $480/ticket, $1,440 total value. Point cost = 120,000. $ value per point = $0.012. I “paid” for one of my tickets from my existing miles account balance.

Total trip value (not including fourth ticket) = $4,520. Total points “spent” = 270,000. Total value per point = $0.0167.

Sure, I could have saved 120,000 points and used them for a future vacation at a higher cash value, but I determined it was better to spend the points now, keep the $1,440 I would have spent on airfare and use it when I get to Hawaii for meals and entertainment.

Consider this – most points programs approximate the value of a point at around $0.01. So, when you “earn” one point per dollar, you’re really getting a rebate of about $0.01.

In reality, it’s probably a little less on average across all points programs. So, when you go to “spend” your points, you can maximize your value if you get more than penny per point value. Or, you can redeem for merchandise, cash back or something else for a value under a penny per point. In the case of GridMaster, he got a $200 surround system for 36,000 points. That’s a value of $0.00556. Not a great exchange, but like he said, he got something he wanted but wouldn’t buy on his own. GridMaster did say he prefers to exchange for cold hard cash, so I’m sure that’s one of his card’s better benefits – hopefully he’s getting a minimum of a 1-to-1 exchange (100 points = $1.00).

In my case, as I mentioned before, I advocate the “combo” programs like the hotels and airlines. They’re a great way to rack up points that much faster. Since I travel frequently, I rack up points at a great clip just by staying at the same hotel chain over and over again. Then, I got their credit card, which earns me extra points with each stay (15 times what I would get with another card), plus the standard 1 point per $ on everything else. The points I earn on my credit card spend get deposited into my hotel loyalty program. So, it took me about 8 months to rack up enough points to turn into a week in Hawaii, airfare included. Not too shabby.

In the end, it boils down to your lifestyle and your appetite for spending. If you’re not a big card spender, don’t take too much time to worry about it because it will take years for you to rack up anything of value. Concentrate instead on the card’s other features such as rate and terms. However, if you are in it for the points – do your homework and squeeze the most out of your rewards, then turn them into something you really want. After all, it’s your money!