Credit cards can be great. I had my first credit card when I was 21 years old and mid-way through college. Prior to that I only used debit cards because I couldn't understand the concept of paying for something without having the money for it. My Canadian bank at the time (TD Canada Trust) was smart. They put a very tight limit of 20 debit card transactions per month after which you incurred fees on every transaction. At first I thought they were doing this because they were incurring fees on those transactions and were consequently passing them on to me. Later I decided they were doing it for the additional money, in order to make a small amount through fees. Eventually I came to the conclusion that they were merely doing this to get people to switch to using credit cards which had an unlimited number of free transactions, as long as you were within the credit limit allotted to you.
I began to wonder why the bank would want me to switch to using a credit card for my everyday purchases, rather than a debit card. Then I looked at the interest rate in APR. Oops.
My bank was secretly hoping that by moving as many people to using credit cards for their daily purchases, some people would overspend, not be able to pay their bills on time, forget to do so on time, or maintain a permanent monthly balance on which the bank could charge an exorbitant interest rate on.
It all made sense now. The entire credit card industry was a huge sham. I felt secretly let down by the world that this was the way the world was hoping to monetize me.
How the credit card companies make money
Part of being a frugal hacker is having a deep understanding how the companies around you make money, especially if they're making money off you or other consumers around you. If someone gives you free money, you ought to question where they're getting the money from and why they would give it to you for free. Surely they must be monetizing you in some way.
Ladies and gentlemen, welcome to the ugly world of credit cards and credit card debt. So many people in North America are so psyched up on credit cards that they willingly maintain a balance on their various cards month over month, not knowing the long-term consequences of doing so. The interest paid on these amounts are absolutely not worth it because the interest rate is bonkers. If you bought a house with that interest rate, you would go bankrupt before you even knew what was going on.
If you have a left-over balance on your credit card from previous months, you need to drop everything you're doing and squash this debt pronto! You're wasting far too much money on interest every single month and this is robbing you from your future retirement, in other words enslaving you to your job for even longer than the 40+ years you're already enslaved for. Do you want to be someone else's money minion forever? Would you rather pay that money to the credit card company, or to your future self? You decide.
Ok so how do I make money from this instead?
I used to feel sad and disheartened for these people on permanent credit card debt previously. But lately, the last 3 years or so, I've been feeling immense pressure to indirectly take advantage of these people who know nothing about how credit cards work. The pressure comes in the form of credit card rewards and points. For years, I avoided this area of my finances because of feeling unethical or immoral to be taking the free money financed by all the countless number of people who maintain a balance on their cards. But as of 2014, I too mere mortal Mr. Frugal Hacker caved into the world of credit card rewards and took advantage of the amazing cash back value I had collected on my Canadian credit card at the time.
When an honest athlete discovers all his friends are doping, he too must start doing so in order to compete on fair ground. With so many of my friends taking insane advantage of all the credit card rewards and points on a daily basis with no guilt whatsoever, it became hard to resist and stay out of the game. Given travel was one of our top 5 biggest expenditures, it stopped making sense to worry about all the unfortunate people across the country who were now about to unknowingly finance our fancy travel plans around the world. At first, it hurt a bit. But as every North American resident comes to learn with time, if you worry about others before you worry about yourself, you're not going to get anywhere.
Since I had entered the game of credit card points extraction, I decided I might as well go all-in and start the process of credit card churning. I was hoping that one day I would just "forget" where all the money for these points and rewards come from and could sleep peacefully at night. Are credit cards some kind of reverse Robin Hood where the poor voluntarily give away their money to the rich, only to make them even richer? This is exactly when a "it's not my problem" attitude comes in handy to help overcome this guilt barrier. Was it really my fault that people were spending more than they should be? Was it really my responsibility to educate people on what an APR means?
Credit Card Churning: Guaranteed passive Income, no skills required
In the next post, we'll talk about credit card churning, a well-known technique to maximize your earnings from signing up for credit cards and collecting rewards and points for simply moving your regular expenses around between various cards. The sign-up bonuses for some of these cards can be insane, and all you need is a good enough credit score to be eligible. Usually 700-720+ should do. See you in the next post!
Did you know where all the free money credit companies give you in rewards and points came from prior to reading this post? Do you feel guilty taking advantage of credit cards points and rewards? Let us know in the comments.