When I first heard about the concept, I thought credit card hacking was kind of cool. I could make hundreds of dollars just by getting credit cards and buying stuff that I would normally buy anyway? That doesn’t sound so bad.
But, like usual, my laziness won out. I have yet to replace my 15 year-old 1% cash back credit card. I just can’t be bothered. Over the years it’s served me well. I haven’t paid a nickel in interest, I’ve gotten approximately $80-$100 in cash back per year, and I’ve got it set up so most of my monthly bills come off it, leaving me just having to pay the credit card off. My credit card is most of the reason why I couldn’t care less about getting a no-fee bank account. I do less than 5 bank transactions a month. I’m not going to fret over 50 cents each time.
Essentially, like I’ve talked about, my life is about simplicity. I will gladly pay a little extra (or forfeit dubious “rewards”) to not have to do something. Plus, it’s not so lucrative for Canadians to do this. Americans get much better sign-up deals.
Still, I can understand why the concept of credit card hacking is attractive. In exchange for signing up for a credit card and spending a few thousand bucks on it (money that probably would have gotten spent anyway), you can get hooked up with hundreds of dollars in free hotel stays, airline tickets, restaurant stuff, free gas, and so on. The PF-o-sphere LURVES this stuff, and you feel like a sucker for being left behind.
Fret not little one. It’s just not that simple.
As the fine folks at Control Your Cash (R.I.P.) used to say, take a look at every transaction from the other party’s perspective. Just what exactly is the Hyatt Corporation or British Airways getting out of teaming up with Citibank or JP Morgan to offer schelps like us $999 in FREE HOTEL STAYS?!?!?!?!
It’s easy, once you think about it.
- All sorts of free marketing, from the lobby of the hotel to the bank branch to the PF bloggers talking about it
- Having the business’s logo on a primary use credit card for a minimum of 3 months, and most likely longer
- Additional customer loyalty because they want to go to that hotel or airline to earn points
- The chance to upsell customers stuff when they do show up. “Oh what the hell? The room was free!”
- A cut of the fee the bank gets every time the customer swipes the card
- Better leverage when it comes time to renew the fees for credit card transactions, which is a huge cost
- Points encourage people to travel, which creates more opportunities to sell flights and hotel rooms
Using the hotel example, it’s easy to see what a sweet deal it is for Paris Hilton’s (smarter) relatives. Giving somebody a “free” room that would most likely have gone empty anyway hardly has any additional cost. You still need to heat the building, keep the lights on, pay the staff, and so on. There’s just a little extra work for the cleaning staff. In exchange, the hotel gets you in the door and hopes like hell that you get breakfast in the morning or rent some porn. Plus, you know, all that free marketing and a small cut of your purchases.
Even a room at Motel 6 is worth more to you than it is to Motel 6, at least most of the time. Which is why you either can’t use the points on a long weekend, or you’re paying out the wazoo for the privilege of doing so.
Even from the bank’s perspective, it’s a great deal. At a minimum, they’re getting a fee each time somebody swipes the card — why do you think the minimum purchases exist? — as well as a certain percentage of people continuing to use the card, racking up interest charges, annual fees, and even more swipe fees. Just look at these numbers, assuming somebody charges up $10k and doesn’t pay it off for a year.
- Swipe fees: 1% ($100)
- Annual fee: $99-$700
- Interest: 18% ($1800)
And, of course, the points are structured so you’re practically obligated to use they to stay at the underlying hotel or fly the underlying airline. They intentionally make them such a good deal that you can’t pass them up.
So what happens? You get logic like this, from one PF blogger on the comment thread of another, talking about how much they’ve “saved” using credit card hacking.
Congratulations, you saved $6,000 on this vacation.
Except you didn’t.
Anchoring is the oldest trick in the retail book, and yet we still fall for it. If potato chips go on sale every 3 weeks, did you really save $1 per bag by buying this week? Did you really save $200 on that vacuum cleaner that used to sell for $649 but has been marked down to $449 today only? Hell, if we take the logic to its conclusion, I could argue that because I didn’t charge you $50 to read this article, I saved you $50.
Besides, who outside of Taylor Swift spends $6200 to go to London and Paris for a week, and not even during peak travel season? It took me less than two minutes to find a direct flight from Toronto to London (via Air Canada) for less than $750 return (per person). I saved $500 for the blogger above in the amount of time it takes to have a bowel movement. If I was willing to make it an 8-day vacation I could fly non-stop for $637 per person. And that’s out of Canada, which is more expensive to fly than the U.S.
It’s the same thing with the hotels. I found many hotels in London for under $200 Canadian per night, which is closer to $150 for our friends to the south and their richer currency. Yeah, you’re not staying at fancy $600/night hotels, but it’s really easy to get 3 stars or better in a great location for under $200/night. And after an additional 5 minutes of poking around, I found out Paris is even cheaper than London.
It would be easy to stay in decent hotels in both places for under $200 per night, including taxes. So to review:
- $1500 for flights
- $1400 for hotels
- $2900 total
In ten minutes I “saved” $3300 on my imaginary European adventure compared to whatever full price is supposed to be.
Okay, fine, I’ll concede that saving $6000 is better than saving $3300, and even if folks spend 30 hours to do it, that’s still $100 per hour. Good news, I have a better way to save $6000.
Oh, like you’re one to talk, Korea boy.
I’m the first to admit travel is a frivolous pursuit that’s become the new status symbol, and I hate myself for liking it. But I’m also doing it on the cheap. My living expenses in Korea are a fraction of what they are in Canada. I’m running around Asia and still saving 80% of my after tax income. That doesn’t make travel any less frivolous, but at least I’m doing it cheaply.
But here’s the deal. I imagine that the above blogger and her husband will spend at least $1500 of their own money while touring around Europe. After all, the trip is “free,” so they can live a little. $200 was already spent on taxes for the tickets, so that leaves $1300 in spending money for a week. They gotta eat, get around, pay to sightsee, and go from London to Paris.
It’s not that hard to spend that kind of cash, especially with two people. So what if you did something different?
Instead of credit card hacking for hotel stays and free airplane rides, why don’t you use your points for things that are actually useful? A $300 iPod that gets used for 2 hours a day for 5 years is an infinitely better investment than a trip anywhere. It’s the same thing if you use it on mundane things like gas, groceries, or even gift cards to a local restaurant. Spend the rewards on stuff you’d normally buy anyway.
If you compare an exotic European vacation for $1500 compared to $1000 in free gas, it doesn’t look like a fair fight. The vacation wins every single time. But by buying the mundane, you’ll save $1000 while the European vacationers will spend $1500, plus had to spend the $1000 in gas. You’re up $3500. Sure, you don’t have a European vacation, but that’s a luxury you can easily go without, especially for an extra $3500.
I’m cool with credit card hacking. But the reality is most folks should stick to regular old cash back cards. Even if you only end up with 1% back from buying $5000 per year worth of stuff, you’d still be $1550 ahead of somebody who unnecessarily spent money on a fancy vacation. Don’t fall for the anchoring. Don’t fall for the emotional pleas. And certainly don’t fall for a blogger telling you to eschew consumerism at every turn unless it benefits them.
Bottom line? There’s a certain amount of bullshit that comes attached to all of this. It’s not quite as lucrative as it’s made out to be. Which is why most people reading this shouldn’t bother.