One of the biggest challenges that CCS professionals will face when helping their clients implement cash flow plans is the lure of credit cards for day-to-day spending. Instead of using the debit card associated with their dedicated spendable account, clients may be tempted to use their credit card to make spendable purchases because they want to collect points. But beware because there are insurmountable problems when clients use credit cards for spendable expenses. In fact, most people will easily overspend using their credit card well beyond any points gained.
Let’s dig into four reasons why credit cards just won’t work as a spendable account, or for day-to-day purchases.
1. Who benefits most from credit card points programs?
We are all so easily conditioned to want to get those points. Your clients are thinking, “Hey, I’m going to spend this money anyway. I might as well get the points.” But it’s only a real win when you don’t overspend by even a few dollars. Why do we see a trend in offering more points on food spending? Because that expense is one of the highest risk costs for most of your clients. The grocery store is a high-risk spending environment and the credit card companies know that. They want your client to be a little less vigilant and spend those extra dollars using their card.
Let’s also consider who is really benefiting from those points programs. Is it your clients? Or is it the credit card companies? What is the usual motivation for their card program design? It’s to get people to spend more. Remember, credit card companies earn their income from clients who carry a balance and pay interest, as well as merchant fees on every transaction. So even if clients don’t rack up new debt, they can still be overspending and eating into other goals they could be funding, all while credit card companies earn on their spending.
2. The pain of paying is diminished
The pain of paying is an important experience that helps clients manage their expenses more carefully because they can feel the impact of financial decisions as they make them. Credit cards are easier to overuse because that uncomfortable pain of paying is dulled. The timing of the act of spending and dealing with the actual cost is delayed, and it can do a number on their behaviour. When they use their bank account to pay, they see their balance diminish, which can slow them down and make them conscious of their spending. Cash also provides a helpful pain of paying effect that keeps clients more aware of their spending.
3. Combined psychological rewards
Not only do credit cards enable clients to avoid some of the uncomfortable feelings that can come from parting with their hard earned dollars to buy something, but making purchases this way exploits our innate cravings for immediate gratification. If your client is also earning points in that transaction, they may get a second psychological win.
4. Timing exasperates the issue
There is a double whammy when it comes to timing. First, it’s important that clients have their spendable account topped up weekly with their recommended amount. Credit cards don’t work that way. Sure, you could have your client lower their limit to their weekly spendable recommendation and then have the transfer pay it off each week. But the problem with that is your client’s utilization on that card will be way too high because they’ll be at or near the limit each week, which is bad for their credit health.They could also go over the limit, which most cards will let your clients do, and then charge them an extra fee for it.
In the early days of testing our standardized approach to the spendable recommendation, we tried having clients use a monthly amount for spendable. That did not work at all. I found the monthly amount would run out for most clients at the 18-19 day mark. But when they used the exact same amount of money divided into weeks, it lasted the whole month. So moving to monthly to use credit cards more easily won’t work well either.
The second issue with credit cards for spendable costs is that transactions don’t settle right away, so trying to manage a weekly amount is a disaster. Everything gets murky and before your client knows it, they are off track and right back where they started, or worse.
The true cost of credit card points
Let’s explore an example. You have a client whose recommended spendable is $400/week. In a year, they’ll amass a total of $20,800 in transactions if they use it all. Surely it’s better to earn points on that spending, right? Let’s see how it works out.
- The card has an annual fee of $150
- The average points earned over the year is equal to 3% cash back
$20,800 spending
$624 value in points
-$150 annual fee
$474 realized annual value in points
If your client overspent by as little as $9.12 per week, they’d totally wipe out the points value.
But most people will spend 15% more when using a credit card to make purchases. What happens if your client is like most people? If your client overspends by 15%, they’ll put an additional $3,120 on their credit card every year.
$20,800 spending
$3,120 overspending
$23,920 total spending
$718 value in points
-$150 annual fee
$568 realized annual value in points
This means that they’ll have spent an additional $3,120 to earn $568 in points. The net financial impact of using their credit card for spendable expenses is -$2,552.
The overspending behaviour triggered by the points inducement will cost the client an extra $2,552 in a year. For many clients, this cost could be much higher. How much sooner would they reach their goal if they’d not accidentally overspent due to the promise of points?
If your client uses a credit card to earn $568 in points by spending an additional $3,120, they are not winning!
If your client could manage to never overspend a single cent, sure the credit card points might be ok, but this simply is not what happens. The risk of overspending far outweighs the value of the points. Stick to a no-fee chequing account with a weekly automated spendable transfer to be successful with a cash flow plan. Remember who’s doing the tempting and who’s really benefiting from credit card points programs.
How to use credit cards with a cash flow plan
Clients who want to earn points can and often should use credit cards for committed expenses when possible. It’s important that if they use a credit card for committed expenses, they are paying it off every month. It’s best not to use a card with a balance that they have to carry because they could lose track of how much they need to pay on it to cover all of their committed costs covered by that card. This will get confusing and could be expensive.
Another way to use credit cards and gain some points that won’t hurt your clients is by making short-term goal purchases backed by funds they’ve already saved. If your client has decided to save for a trip they’ll take in nine months, they should be taking the recommended amount of their money found and moving it over to savings each month. When they’ve saved enough, they’ll need to purchase their travel and accommodations using their credit card in most cases anyway. In this case, they can make the purchase on their credit card within the amount they have saved and then move the savings over right away to cover the cost. They get their points, but they don’t overspend. This strategy is too much effort for day-to-day spending, but great for things the client has saved up for, as long as they don’t spend more than they’ve saved.
Points benefits that don’t hurt the cash flow plan
Points that don’t require the use of a credit card are a great way for your clients to save money or accumulate points that can supplement their expenses. Encourage your clients to make use of all points programs that don’t require them to use a credit card. These programs can help build buffers in their spendable account when they cover weekly groceries with points, for example. Clients could even move the cash amount equal to the points they used over to their short-term goal account.
If you look closely, you’ll find there are plenty of articles that favour the use of credit cards vs. debit cards because of points. If you take a few seconds, you’ll find most of those posts are sponsored by, or feature ads from credit card companies. So take those articles with a grain of salt.
Credit cards definitely have their place in your clients’ financial lives, and their use can be incorporated as part of a cash flow plan. But they should never, ever be used for expenses that should be covered by the weekly spendable.
Would you like to learn more about how the spendable and committed expense concept works? Check out our CacheFlo Suite demo, or join our next Cash Flow Planning Implementation Program!
About CacheFlo
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.
About the Cash Flow Planning Implementation Program
The Cash Flow Planning Implementation Program is a 90-day program designed to help financial professionals overcome obstacles and seamlessly integrate cash flow planning into their practice. In the program, you’ll get access to the essential skills, support and tools needed to start seeing revenue from cash flow planning and how it benefits your clients. Learn more about the Cash Flow Planning Implementation Program.
