Frugality and credit card rewards
TLDR: Credit cards and frugality, sounds like a oxymoron. Let me prove otherwise in this post\
The popular advice from most investment gurus and new age financial advisors is some / all of the following
Do not use credit cards
They are bad for you.
They lead you into financial ruin by charging exorbitant fees.
They decouple the idea of money from expense
They desensitise you into spending more
This is not bad advice. For most people with poor impulse control and lack of financial discipline this is excellent advice.
But if you are someone who have made a decision to FIRE by actively saving, living within your means and managing your finances well these need not apply.
Credit cards are another way to spend the money you have. The important thing to note is that you are allowed to only spend the money you have, irrespective of whether it comes out of your bank account or credit card.
My Credit cards
As my wife would attest, I am a little obsessed with credit cards points and rewards. I have a total of 10 credit cards. You might consider the number too high, I do too. But to be efficient about the credit card spend and optimise for reward points I need to have this many credit cards.
Even though I have this large number of credit cards
I never roll over credit, always pay in full
I never miss payments and never incur late fees
My credit rating is AA which is the highest possible in Singapore.
Credit card rewards if used for anything other than miles redemption is poor value. So I optimise my spending towards earning miles and redeeming miles for my vacations.
I also don’t shy away from credit cards with annual fees, provided they given me good value. As recently Standard Charted bank had introduced a credit card with 695$ annual fees, but comes with 100,000 miles provided you meet some spend conditions.
How can I justify spending almost 700$ on a credit card? Easy.
My flights to India costs around 400$ per person during the peak vacation period of December one way.
so a total of 1600$ for a family of 4.
Miles redemption for a family of 4 one way (economy) = 74,000 miles + 200$ in taxes
So my spend = 200$ (taxes) + 695(credit card annual fee) + 27$(redemption fee) = 922$
Effective saving of 678$ + 26,000 miles to spare
Not bad, eh? I easily get more than enough value from the miles redemption to pay the annual fees one credit cards. And most cards provide additional perks that can be optimised as well.
Most times, I would even be able to redeem business class tickets using miles than economy. But this time I decided not to splurge as we are saving up miles for a possible upcoming trip.
Like any financial product, Credit card is another tool in your tool kit to effectively manage your finances. Know the pros and cons of this product and use them to your advantage. When used wisely, credit cards can provide good value and help plan spending in ways that can optimise your returns.
If you are looking for references on how to learn more, refer to my previous post on the topic here.