Optimal Credit Card Usage

For people not living The Data-Driven Life, credit cards are a ticking time bomb. We’ve all heard the warnings: spending increases when people use credit cards instead of cash, total US credit card debt passed $1 trillion in for the first time in 2018, and 41.2% of American households carry credit card debt from month to month.

One survey even came to the conclusion that for millennials, credit card debt is scarier than death.

Bombarded with articles like these, younger people are becoming increasingly wary of credit cards. One recent study from VISA found that millennials now use debit cards more frequently than credit cards: 28% of their purchases go on debit cards, while 27% go on credit cards. (Personal checks, shockingly, still account for 8% of all transactions for that age group.)

If you can’t understand that credit card purchases cost real money just as when you pay with cash, by all means, switching to debit cards makes sense.

For the rest of us, we can and should allow the bad behavior of the masses to subsidize free income for us.

(This will be a recurring theme on this blog. The masses who throw away their paychecks on the lottery subsidize us being able to get free money from the lottery, for example. We’ll always look for opportunities where the illogical behavior of the masses can subsidize the data-driven behavior of the few. )

So how should we use credit cards profitably?

Part 1: Maximize Your Rewards

Everything you buy should earn you a minimum of 2% cash back. The Citi Double Cash card can be your standard go-to card to make that happen.

Often, however, we can get 5% or more back in certain types of purchases. The Discover It Cash Back card offers 5% cash back in revolving categories. On its own, that’s not terribly impressive or unique. The Chase Freedom card, among others, does the same thing. But at the end of your first year with the Discover It Cash Back card, all of your cash back bonuses are doubled, and you receive that amount as an additional lump sum. This can effectively get you 10% cash back in rotating categories throughout the year, which is excellent.

To get 6% back on groceries, I recommend the Blue Cash Preferred Card from American Express. Finally, to get back 5% on purchases at Amazon.com, I recommend the Amazon Prime Rewards Visa Signature Card.

 Part 2: Bonus Churning

Many credit cards also offer large cash bonuses or other rewards (gift cards, airline miles, etc.) to get you to sign up with them. I recommend taking advantage of at least one to two of those sorts of offers per year.

The first bonus I claimed this year, and the top one I currently recommend, is the deal from Chase Sapphire Preferred. If you spend $4000 in 3 months, you get points worth $500 in cash back. If you use the points on travel, you get an extra 25% bonus, making them worth $625. Add a second user on your credit card and receive another $50 cash back (or $62.50 for travel).

My wife and I signed up for this card well in advance of a trip we already had scheduled for July 2018, and after spending $4000 on this card, we were able to save over $725 in airfare costs ($687.50 from the initial bonus + the regular cash back for the $4000 spent). We effectively got over 18% cash back for purchases we were already going to make over a 3-month period. That was well worth the hour or two of hassle we put into signing up, using the card, and spending the points.

A list of other excellent bonus opportunities can be found here.

If you stop here, you could easily be making $1,000-$2,000 per year in credit card rewards and cash back. The credit card companies will be losing money on you, but we won’t shed a tear for them; the masses will provide them with plenty of profits to more than make up for it.

Step 3: Bolder Moves — Selling Trade Lines, Exploiting 0% Interest Rates

If you’ve got good credit, you can profit by using it to help improve someone else’s credit.

In the opening post of what has become a massive thread on the Money Mustache forum, user arebelspy explains:

[A person with bad credit] might pay $1000 (or whatever–all the numbers in this post will be illustrative) to a credit boosting company, who acts as the middleman bringing together people who have credit cards with a long history and/or high limits, and people who want their scores boosted.  That company then turns around and pays you $125-275 (depending on the card’s age and credit limit). You add the person as an “authorized user” on your credit card you’ve had open, say, 5 years that has a $15,000 limit, and no late payments ever, and you spend a few bucks on the card, so it closes with a balance.

This new authorized user never receives a card, and can’t spend any money on the card (see more details on this below).

A few weeks later, your credit card statement closes, the credit card company reports to the credit agencies that this individual is an authorized user on this card, which now, due to the amount of time the card has been open and the extra available credit, boosts their score.  They go buy the car, and save a bunch of money on interest.

A month later, you remove that person as an authorized user.”

Disclaimer: although this is perfectly legal, it is often against the terms of service for a credit card company, so you can attempt this at your own risk. Even if you (like me) choose not to go down this route, it does open up some questions: If I could profit from selling my credit score, what other data points might I be able to profit from? More on that is coming soon in another post.

Finally, many credit cards have 0% interest offers for the first 12-18 months that you own the card. (A list of these cards can be found here.) An aggressive approach could involve putting your typical purchases on that card, then investing the money you would have used to pay off the card in an interest-bearing account until just before the 0% interest rate expires.

Far from being a ticking time bomb, credit cards are an incredible opportunity to stretch your income by at least $1,000-$2,000 per year. To live a Data-Driven life, you should take advantage of this.