Hey friends, today a little bit of a rant on credit cards.

Have a great weekend.

Eddie

Most, if not all, of you have a credit card, perhaps multiple, and there are good reasons to have them:

But like most financial products, they are useful when used correctly and can be disastrous when not.

I read an article in the Wall Street Journal this week “Gen Z Has Just Discovered the Premium Rewards Credit Card”, which describes how Gen Z and millennials now account for 65% of American Express’s new consumer accounts globally and more than 75% of its premium card sign-ups in the USA.

One 22 year old got an AMEX platinum card that has a US$895 annual fee, while other young people are using excel spreadsheets, AI, and online forums to track and game the point system “to their advantage”.

But while some may be able to game the system, the majority fall into the usual trap of making purchases they would otherwise have not.

Amassing credit card rewards doesn’t automatically mean you get to enjoy life more. It really only means you were successful at making consumption feel like an accomplishment. And I specifically use the word consumption, because credit spending is so far away from productive investment debt it’s not even funny.

Some will argue that many of the charges are necessary, like travel for business, and I can’t argue against proper spending for items you would actually require, but again, for the majority, they are psychologically mind warped and convinced by these multi billion dollar companies into thinking that more consumption is a fabulous idea.

Why? Because they EXPECT a majority of users to spend more than they earn, carry a balance, and pay 22-30% interest. For context, most of you know already, the best investor in the world Warren Buffet has compounded his money at 20% during his investment career. So all of a sudden, these credit card users that get out over their skiis are now doling the benefit of a HIGHER rate of return to the credit card company (adding to it’s market value of course).

Essentially, you spend more money, the bank collects more annual fees, you miss payments, they earn 22-30% interest, and the little progress bar on the points system keeps filling up to placate the desire for rewards. It’s classic emotion playing into this (like kids video arcades or the youtube shows for children of the 21st century that cut scenes every 2 seconds to ensure attention is paid).

I found it quite obtuse that the President of Chase Credit Cards (of JP Morgan Chase) noted in the article about how “Millennials and Gen Z are ultrasavvy and they’ve got more tools than anyone has had in history to choose the right product for them”….when the CEO of a multi-billion dollar business calls you ‘ultrasavvy’, get your wallet ready folks!

I’ve always had this burning opinion that credit card points, etc are, for the majority of users, a financially reckless feature. To make sure I’m not talking out of the side of my mouth, I did do some ChatGPT to help prove my thought out.

So people are spending real money to collect arcade tokens, frequently failing to use those tokens, allowing the companies to change what the tokens are worth, all the while steering people into thinking they are winning and leading a majority of users to go heavily into the worst type of debt there is.

Spending $100,000 might get you that $2,000 round trip flight to italy on “points”. Once you’re there, you spend another $8,000 (of money you don’t have), you get home, and it takes you 4 months to pay it off.

Congrats on the free flight…now what?

None of this means rewards are useless or that credit cards are inherently bad. Someone with discipline that automatically pays the entire statement every month, never makes a purchase decision because of point reward, chooses a card that matches spending they were already doing and regularly redeems the rewards can come out ahead.

To use an analogy I love, like a chainsaw, wielded with purpose and discipline, you can achieve great things. Use it incorrectly, you might lose an arm, or worse.

Sorry for the rant, hope it helps!

"Saving is the gap between your ego and your income."

—Morgan Housel

How many credit cards to you have?

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