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July 30, 2008


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I just got a Blue Cash card a month ago - the same time I had twins. So I'm looking forward to matching those numbers above! In the past I have primarily used a Citi Dividends card, but I kept maxing out the $300 cash back limit halfway through the year. So I switched to Blue Cash.

I think I would rather keep my spending around $30k per year and get $500 back per year than spend more than twice that to get $900 back. Even with a baby and including medical costs, that sounds like a lot. Good that they are getting rewards, but this might be an example where people are spending more just because of the rewards. And at least for us, there were some utilities and our mortgage that we couldn't put on our credit card.

I apologize for repeating myself: Blue is great for a single-card strategy only if you spend a *huge* amount *SPECIFICALLY ON G/G/D*. After the OP reader's extraordinary expenses (childbirth) are out of the way, I think he'll find himself better off with a 2% cashback on everything VISA/MasterCard without the $6,500 tier.

See my comments at I will be happy to supply the spreadsheet upon request.

Also, for the OP: many big-dollar places like childcare providers and summer camps you'll face in the future don't take Amex because of the high fees. You want to be prepared with a nice 2% VISA/MasterCard if/when you face these merchants.

Finally, is Blue's rebate issued annually? With the 2% cards, you get the money back monthly (assuming you meet a minimum amount earned). I suspect the yield you'd get back on a 2% card with monthly rebate would equate to at least 2.08%

You know, I heard good things about this card, so I applied for it and they sent me one. Then they *called* asking for another phone number to contact me at besides my home number. I thought this sounded fishy=- why not send a request like this in writing- I immediately thought of identity theft and did not want to give the caller any personal information. I said I could give them my cell phone number, but they said that they could not "verify" that and that they needed another number (which was not possible). I don't understand why they were asking for another phone number- I have an excellent credit rating and absolutely no debt (not even mortgage debt!). I told them to just cancel the card- I didn't need the hassle. They just lost an excellent customer through their foolish policies.

So, let me understand this... You had to spend $37,000 on a credit card so you could earn $775? There are studies that show that when people use credit cards, even if they pay it off every month, that they spend 12-18% more. I wonder if this applies to you, because if so, you could save a TON more by paying cash.


So, let me get this straight. Your reader spent $37,000 to get $775 cash back, which is about 2%. This doesn't seem like such a great deal when you consider that studies have shown that we spend 8% to 12% more when using plastic, with gusts up to 46% at certain retailers.

I know, I know. People are thinking, "Hey, that's not me. I go in that store with a plan, and I know what I'm going to buy." We all seem to think we're somehow above the data, don't we?

But think about what Cornell Economics Professor Robert Frank says. Paying with plastic is abstract. There is enough disassociation between the product and what we pay for it when we receive our bill a month later that we don't connect the transaction with real, pure money. So it's easier to spend more.

Still not convinced? Think about this: Retailers pay anywhere from 1% to 5% at each transaction for the privilege of accepting your credit card for purchases. Do you really think they gladly take a cut in their profits so you can swipe and carry? Of course not. They know that while they pay for the privilege to accept plastic, you're going to buy more product to offset -- if not increase their profit margin! These retailers aren't stupid.

Your reader would have been much better off paying cash for the transactions, which would have saved him or her about $2,900, or 8% of the total purchases made on plastic. Saving $2,900 sure makes that $775 look like a drop in the bucket, don't you think?

Seanian --

Do you actually think they spent more on medical costs because they were paying with a credit card? And do you think that one person not using a credit card will lower retail prices? I don't think so.

Moreover, if you read your comment above, there are qualifiers such as "it's easier to spend more" from Professor Frank. This doesn't mean it always happens or that it even happens to most people, just that it's more likely.

There's no doubt that many people overspend because they have a credit card. Look at the on-going debt levels in our country. But to take this information and say that because it's GENERALLY true that it's ALWAYS true (meaning that it applies to every person all the time) is an incorrect use of facts/data.

I've heard this "study" before from the Dave Ramsey show, and I tend to believe that most people with rewards cards will spend more using plastic than if they used the cash available in their wallet. The same is true if using a debit card, since most people don't keep daily tabs on their checking account balance. The psychology is sound.

However, I believe most of the people who frequent this blog and others like it, do NOT spend more to get the rewards. The reader's example above doesn't particularly surprise me. The spending on gas, groceries, and drugstore purchases seem to be about average for a family of three or more. The "other" spending could be temporary because of the medical bills. In my case, I charged college tuition in a single year that added up to over $20,000 (it was reimbursed by my company of course), and with no extra processing fee for using my Discover Card.

I have no doubt the faithful readers of this blog have no problem spending more just to get a reward. They fully realize the card is a cash account payable every month, and any extra spending is done on items they know they absolutely need and will eventually consume.

"I have no doubt the faithful readers of this blog have no problem spending more just to get a reward."

I have to watch those double negatives...let me rephrase that..

I have no doubt the faithful readers of this blog do NOT spend any more just to get a reward.

Our medical flex spending account actually supplied us with a Visa debit card that we're supposed to use for all applicable transactions. I guess there's no reason we *had* to use it. In hindsight, we also had a baby this year and it would have been really nice to get a rebate on all those medical expenses.

On the plus side, we also got a new HVAC system installed in our house and the contractor was willing to take our Amex Rewards card to cover all the costs -- he even gave us the "cash" rate which was a quite a few percent less than if we had financed through them.


Presumably readers of this blog have some sort of discipline and know when to say "no" to a decision about whether to spend money or not spend money.

Sure, some out there can't control their spending and make bad decisions and wind up spending $37K, 8-18% of which may be for total crap. But others happen to have high non-discretionary expenses and want to make them in the most cost-effective way possible, i.e. in a way that gets them the maximum rebate.

So, which is smarter: Paying my childcare providers and summer camps $25,000/year on a credit card and getting back $500? Or paying $25,000 in cash and getting back nothing? Or not sending my kids to daycare or summer camp at all?

Blanketly portraying those with high levels of credit card spending as somehow being any less responsible in their spending decisions is unfair. 'Nuff said.

FMF - Your point is valid that paying medical costs is not the same as walking into a grocery store and throwing a few extra items in the basket, so allow me to refine my math.

At $9,800 of non-medical purchases, your reader claimed a 4% return of $409, which is roughly half of the $784 he or she could have saved if using cash.

Marcus, I'm not saying this person deliberately spends more to get the return. More accurately, we (note the collective) spend more using plastic than we do using cash because cash is decidedly finite and immediate, so it's much easier to throw a few extra items in the basket, as it were, because when using plastic we don't have a set amount of greenbacks in our wallets to lead us to think twice about the purchase.

I should also point out that human behavior is not like a switch, meaning either you do or do not fall prey to the disassociation that comes along with plastic. Rather, we are each individually on a fluid point on a continuum. Some of us are more apt to be on the high end (12% to 18%) at the grocery store, which others would be on the low end (5% to 8%) at the same store. There are layers and layers of behavioral psychology at work here, and even layers of sociology.

So, FMF, the generalization stands true in a population. Remember the good ol' bell curve we all learned about. Of course, everyone thinks they make up the standard deviation, but the fact is only about 10% of us do, and there isn't enough room for us all to be in that 10%.

This year, my wife is taking online classes for a masters degree (which will pay for itself in two years after she finishes due to pay increases). Her total bills have been around $12k - all onto the Amex Blue Cash. Add to that a vacation and some utilities that we would pay to same for regardless...

Do I feel great seeing how much I've put on a credit card total this year? No. I wish I could have the same experiences and services and pay less. But I'll take the $500+ in cash back for getting the security of using a card and not carrying hundreds of dollars of cash with me on vacation.

"There are studies that show that when people use credit cards, even if they pay it off every month, that they spend 12-18% more."
Have you actually seen any of these studies? Have you had a chance to review how the study was done what group of people was studied, whether or not they carried balances, what the distribution was? Distribution is really important here because one person who spends 100% more can easily screw up the statistics.

We don't know anything about the person. Do they take any prescription drugs? The co-payments on those can easily add up. Did their child need braces? How many cars they have? How far they have to commute to work? How many children they have? Any child in a private school? Any child doing expensive sports like elite gymnastics or figure skating? Music lesson for a child? An older child in college with part of credit card bill is for college tuition? It is completely impossible to make any kind of judgement just based on the amount. Do they use credit card to pay mortgage?
Any major appliances like furnace needed replacement?

It is completely impossible to make judgements based on the amount of money spent without knowing the details.

Seanian: The whole point of the FMF blog is to help educate consumers on how to leverage tools like cash-back, no-fee credit cards to save money on purchases they would have otherwise made with cash. We don't know what purchases are categorized as "absolutely necessary for human survival", or "frugal consumerism", or "living within your means", or "extravagent and unnessary" -type spending habits. We have to assume that the most frugal person never buys anything more with a credit card instead of cash than is needed for a happy life, OR that the more extravagent person never buys anything more with a credit card instead of cash than is needed for a happy life. No one is advocating an Amish lifestyle on FMF.

In this case, the end justifies the means. Regardless of where you are on the lifestyle continuum, you will be getting back 2% of any money you spend, guaranteed! If you believe strict frugality is the means to happiness, or a little more materialism is the means to happiness, either measure of happiness still benefits from the common denominator--in this case, a cash-back rewards card! has a savings account at 3.5% with the Extra Earnings Visa Card gives you 2% cash back for a year and then 1% after that. This automatically puts $25 into your savings account earning 3.5% every time you earn 2500 points

Do you all report the cash back as income and pay taxes on this amount?

The housing bailout bill that was just signed by Bush has a provision for reporting all credit card transactions to the IRS starting 2010... I wonder if this means that cash back is now part of taxable income?


"Do you all report the cash back as income and pay taxes on this amount?"

Mike: Cash back from credit cards is not income. You are getting a discount or rebate from the credit card company directly, and indirectly from the retailer, who is in turn giving up some profit margin to an agent (Visa or Master Card) by accepting your credit card. The credit card company, retailers, & businesses are gaining sales volume at a lower margin and are the only ones getting income that's taxable.

If rebates were income, you would have to report every discounted purchase you haggled away from the seller, whether you paid with a credit card, cash, or value of bartered goods. With cash-back, the credit card company is doing the haggling for you. Some smart businesses are even giving discounts for cash. They see it as more profitable to give you 3-5% off than to give the credit card company 5-7% merchant fees.

"Cash back from credit cards is not income."

Usually not for personal expenses. But in cases where the card is used to pay for a deductible business expense, you are only allowed to deduct your true cost of the goods or services purchased--and that true cost is the discounted amount *net of rebate.*

Regardless of whether you report the amount received as additional business income, or as a reduction to your business' deductions, the bottom line taxable income is increased by the amount of the rebate.

In IRS-speak (Publication 17), “A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate.”

Your CPA may tell you not to worry about it, but that advice relates to materiality, not the technically-correct tax treatment.

I'm the original poster. A couple of quick points:

1- I forgot to mention that we bought a car this year and put the maximum amount the dealer would let us on the card ($5,000) and paid cash for the rest. And that was, of course, after I negotiated to a just under the price at the low end of the Edmunds "True Market Value" price for our configuration and location. We paid cash for the rest. That also includes some startup expenses for a business I'm starting, which get reimbursed.

2- We're thrifty as hell (by which I mean, far more than the average American, but probably about average for the readers of this blog). We don't buy things for the reward. We use the reward card so we can save a little extra on the things we buy. My wife clips coupons on Sunday mornings while I track all our expenses on Quicken and keep an eye out for fat to trim.

3- I'm not aware of very many situations where paying cash actually lowers the price (even with the car, I didn't discuss how I was paying for it until we settled on the price). So if you're going to spend the money, even with the inflators for the vendors' transaction costs, you might as well get some of it back.

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