Why Most Millionaires Use Credit Cards
You may have seen me writing about the dangers of credit cards, yet if you go out to dinner with the owner of a company, does he pull out an envelope and hand over cash? Or does he pull out a beautiful shiny metallic card that looks a little nicer than the one you have?
Why I Purchased a Chase Card
Many millionaires not only use a credit card but pay an annual fee for the privilege. I recently decided to upgrade to a Chase Sapphire Preferred card which carries an annual $95 fee and seriously thought about spending $450/yr to upgrade to the Reserve card before deciding there wasn't enough difference to justify the extra investment. For those in the Dave Ramsey training camp, that's blasphemy. For those in the FI (Financial Independence) community, it's standard procedure.
If you can't control your spending, you shouldn't have a credit card.
Dave Ramsey is right on that subject, it's like giving an alcoholic a beer, it's a bad idea. But if you use it merely as a tool, credit cards aren't necessarily evil, and they're a lot more convenient than carrying around wads of cash.
Convenience is why most wealthy people still use credit cards.
Beyond convenience, here are three of the reasons I upgraded to a credit card with an annual fee. These are some of the same reasons your average millionaire keeps a card or two in their wallet and uses them for everything as well.
1. Travel Rewards Program
I take my family on multiple vacations each year. With seven of us, that adds up in a hurry. Airfare, in particular, is enough to make most people wince. When I signed up, there was a 60,000 point bonus available, that's worth $750 towards travel.
Let's see….spend $95 on the card, get $750 that I'll use next year.
Is this an IQ test?
2. Better Rewards
My previous card had rewards, and I used those points to pay down my mortgage regularly as that was the best conversion value, but the point value wasn't quite as good as this one. When you earn points on a credit card, you're essentially getting a small percentage back in rewards. The math on the Chase card worked out better as they give you back a larger percentage of each transaction.
The credit card companies can do this because they charge the vendor a slightly larger percentage than they give you on each transaction. For example, they might charge the store 2% to process a credit card transaction and give you 1% back in rewards. If you don't pay the balance off each month, they'll also smack you with hefty interest charges, so it's a win either way for the bank.
They want you to spend a lot because every transaction you do puts money on their books, so they incentivize that behavior with rewards. That's a good thing for you as long as you understand how the system works and don't go buying things you don't need just to get points. What you want to look for is a card that gives you a larger percentage of each transaction back, which is exactly what the Chase card does.
3. Referral Bonus
I'm a blogger with a pretty large fan base, so I'm always on the lookout for referral bonuses on products I use. The chase card happens to have a pretty sweet referral program.
For every person who signs up using this link, I get a bunch of bonus points worth roughly $150-$200 in travel rewards. I'd use the card regardless, but it's a nice touch.
Return on Investment
Millionaires look at these types of things as an investment rather than an expense. They'll invest $95 in a card like this to get back $750 in travel rewards plus free trip protection, rental insurance, referral bonuses, super-fast tap and go payments, etc. It's an immediate 700%+ return on a minimal investment, and they will keep earning more as they purchase things they were going to buy anyway.
It has nothing to do with needing to borrow money, and everything to do with getting nice perks. Many people in the FI (Financial Independence) and business community never pay for vacations because they've figured out how to work the system, the same system that can bankrupt someone who isn't disciplined enough to pay their bill every month.
The key is that they will also pay off that card every month, and won't purchase things they weren't already going to buy to get points, because that's well, pointless.