Episode Transcript
[00:00:00] Speaker A: While there are plenty of reasons why a high income earner can and should choose to pay for certain expenses with a credit card, there are also people out there who earn a lot of money but can't seem to get that credit card monkey off their back. And in certain instances, they should avoid using their credit card. In this episode, we tell you some of those times when they should keep it in their wallet and or their purse. Let's get started.
[00:00:21] Speaker B: Let's get some money from new money new problems. It's the new Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
Negotiating compensation, purchasing your first investment property, helping your family with money. The highs and lows of, uh, entrepreneurship. New money brings new problems that require new solutions. Join us as we work through them together.
I'm Brenton Harrison, and this is the New Money New Problems podcast.
[00:00:59] Speaker A: Hello. My name is Brinson Harrison of new money new problems and your host for the new Money New Problems podcast. Over the past couple of weeks, we've been sharing money stories of people we find interesting. But a few weeks back, we did an episode on, uh, whether or not your credit score really matters. And in that episode, I told you that it was intentional, that we've kind of taken a while to address credit in this episode. But now we want to continue along that thread and provide you some resources. Because, as I've also shared on this podcast, I actually think that it is more likely, or I should say it is easier for a high income earner to get to, like, a kind of insurmountable. Nothing's insurmountable, but a seemingly insurmountable amount of credit card debt as compared to what they could accomplish or what they could accrue when they were making less money and they were younger. A lot of those reasons have to do with the ability to get higher credit limits when you're a high income earner. The likelihood that you could have a high credit score while also not managing your credit card debt well is a higher likelihood for a high income earner than someone who makes, uh, an average wage. But that's kind of another conversation for another day. In today's episode, I want to give you some resources. If you have found yourself in a situation where you're trying to manage credit card debt and are doing so poorly, uh, why you should choose to keep and when you should choose to keep your credit card in your wallet or your purse, the first reason is a pretty obvious one, and that is if you're buying a want to item or charging a want to item that you can't afford to pay for now. Now, I often see this on the smaller level, although some of these vacations aren't small, but you see it with vacations, right? You know, we'll pay for the flight, we'll pay for the hotels on the card, and by the time we get back from the vacation, we'll start addressing the debt itself. And as a person who has done pretty much everything that I'm going to talk about in this episode, I can attest there's no worse feeling than half enjoying a vacation because you're thinking about how much you're charging and then finding the actual total when you get back from vacation. It's just not a good way to go back into the work week. But the biggest expense that I see it for, which to me in most cases is just a horrible mistake, is home renovations. You're upgrading a bathroom. You're upgrading a kitchen. You're putting in new shelving. And if I told you, sure, you can do these things, but you got to give me a check for it in full today, it's likely something that you would choose not to do if that were your option. But because you can put it on that card and kind of address it later is something that you choose to do now. It's different if you have a plumbing issue or something that has to be done around the house and you don't have emergency funds and the like. But in most cases, if you have a want to item and you wouldn't want to make that payment today, then I would choose not to put it on the credit card as just kind of a way to keep yourself from yourself. The second reason to avoid using your credit card is if you're only making a purchase because of what you're thinking you're getting in return. When it comes to rewards points and the value of those rewards points, if you're looking along on screen, and we'll put this article in the show notes, if you're listening, we're looking at an article from bankrate, uh, that really just goes through the actual value of rewards points and miles that you see with popular credit card issuers. You can see American Express, bank of America, travel Rewards, Capital one, Miles Chase, ultimate rewards, so on and so forth. And while each of these cards probably gives you some type of multiplier if you buy a particular type of purchase with the card, for example, if you buy a flight with this card, you get two times points or three times. Miles. This article goes through the baseline value of each of their rewards points and miles, meaning, if I'm not redeeming it or using it to pay for something that applies to a multiplier, what is just a basic point worth with these issuers? And it's really important that you look at this, because when I come across many high income earners who take an interest in the credit cards that they have and how they use them, a lot of them don't really take enough interest in figuring out, uh, how much they're getting in rewards as compared to the fee that they're paying for some of these top tier cards. I'm going to pick on American Express a little bit. You can see that the baseline value of a reward point with American Express is one cent. And I often see for this particular credit card issuer, people who will have the MX gold card or the Amex Platinum card. And to me, in most cases, it's more of a status symbol. But there are people who say or believe, oh, it's because of the travel perks that I get for having this particular card. So let's look at the Amex Platinum card. And you can see on a promotional page for Amex, uh, that this annual fee for a platinum card is $695. But I want you to think about it this way. If you're getting a cent for every dollar that you spend and you're not redeeming these points for things that are eligible for multipliers, that would mean that you would have to spend at least $69,500 per year on this card to break even for having the card, not to profit for having the card, to actually break even for having the card, you have to spend at least 69,500 for it to just make sense. Now, obviously, you're looking at this promotional fly and you're saying, yeah, but I'm using it for things that qualify for the multipliers. If you're looking on this page, it says that if you buy flights through Amex travel, you get five times points for every dollar that you spend. The same is true for hotels, whereas everything else is one times membership reward points for every dollar that you spend. So let's say that you're like, yeah, Brinton, but I travel all the time on this card, and that's what makes it worth it. And you told yourself that you wanted to have at least half of your annual fees covered by the redemption value of your travel points through amex. Uh.com dot. Well, that means that even if you want to cover half of the fee with those points, which is $347, you would have to, at five times multiplier, spend at least $6,950 on flights and hotels that you booked through the site. So when I come across people who might travel once every other month, and I compare what they're getting in rewards points per year to the fee that they're paying, I find more often than not that they're either barely breaking even or the majority of the time they're actually losing money for having that card every single year. And you may decide whether it's the Centurion lounge or being able to upgrade a hotel, that you are okay with it costing you to have this card because of some of the perks that it provides. If you're in a situation where you handle your credit card debt, well, then that's something that you can choose to take on. If you're struggling with credit card debt, you are not in a position to be making purchases specifically for the rewards points. Along those same lines, although this portion will have a bit of a caveat, I have seen people run into situations where they're making a purchase online because you can use a credit card, but they are not paying attention to the fact that there are credit card processing fees to make that transaction. You see this very frequently with people who pay their taxes. Technically, you can pay your taxes, annual taxes, quarterly taxes online, although based on the third party that you use, there's going to be varying levels of credit card processing fees. But you see this for online purchases as well, where they may want you to use a debit card, or they may want you to use an Ach. And if you choose to use a credit card, they might charge you one and a half to 3% in processing fees. Well, going back to that article where we talked about the redemption value of those points, if we're now understanding that even on the high end, the redemption value of most of these carriers are limited to 1.5 cents per dollar that you spend. If you're paying 2.5 or 3% in transaction fees and you're only getting 1.5 cents back. It's one thing if you're doing it for some bonus or multiplier, which we're about to discuss, but just on a day to day basis, you often find yourself, if there's a credit card transaction fee, losing money if you could pay via ACH, but you choose to do so via credit card. The caveat to that, however, is a bonus offer or a welcome offer. So I picked on Amex a little bit. Now let's go to a scenario where we're giving them some credit, or at least identifying a scenario where you might choose to make a large purchase in spite of the transaction fee because of what it might make you eligible for in terms of a bonus offer. The fact of the matter is, the more money you make, the better your credit. The more cards you have access to that have special perks, but also have sign on or bonus offers. On this promotional page for MX.com, you can see at the bottom that if you spend at least $8,000 on this card within the first six months of card membership, you get an additional $80,000 bonus point as a reward for spending in that period of time. If you compare that, uh, with the redemption value of a penny, we know that 80,000 points is worth about $800. So in this scenario, not only would you cover the $695 fee in the first year, you would actually be dollar 105 above it. So if you're looking and you're trying to find a way to make enough purchases to qualify for that offer within the six months of opening the card, or some carriers is three months in a lower amount, then you don't want to qualify for that offer by spending stuff or buying stuff that you didn't have to buy in the first place. But something like taxes that you have to pay. If that's a big enough expense to get you over that hurdle, you might find yourself in a scenario where doing so gives you a reward or bonus offer that exceeds what it's costing you to pay that transaction fee instead. Before I get off that topic, however, when it comes to taxes, I do want to make sure people understand that, but, uh, it's also common for a high income earner to get in some tax trouble. When you're trying to navigate how much you should withhold from taxes, you're making more money. Maybe you have bonuses here or there that you didn't know how to account for, and you might be looking down the barrel of a tax bill and saying, well, I don't have the money to pay this right now, so I'll just put it on a credit card and deal with it later, assuming that there's no ability to negotiate with the IR's. And I will tell you that in terms of the interest rate charged on a tax debt, you will often find that that interest rate from the IR's is more favorable than paying interest to your credit card issuer. So rather than just assuming you have no option I would at least communicate with the IR's that you're unable to pay the lump sum, figuring out what payment plans would be available, and then deciding whether it makes sense to put it on a card or to just initiate a payment plan directly. With the IR's the last financial scenario, and then we're going to devote the second half of the episode to some other things. Where I think you should avoid using a credit card is if your minimum payment has gotten to the point where that in and of itself is problematic. But if you're looking at that minimum payment and it's risen to the point where not only can you not pay extra, but the minimum payment in and of itself is an issue. That's a scenario where you have reached a state of your finances where you're in an emergency. We talked when this podcast started about there being periods where conventional finance goes out the window. One of those periods I mentioned is if you don't have at least a month's expenses and savings, then you don't need to be doing things like putting money in your 401K because you're not in a position where you can withstand an emergency. I would argue that if you're in a situation where the minimum payment on your credit card is so high that you can barely make that payment, you're in a similar state where there needs to be a deeper level of urgency that's applied to your situation, and some other things may need to be put on pause until you have a plan of action that can address the state in which you're in. Now. While those were financial reasons to avoid using a credit card, after the break, we're going to get straightforward and honest and transparent about some of the relational elements that are at play with credit cards and how those can impact when you should or should not use them with the people around you.
[00:13:06] Speaker C: This is the new Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles theyve never seen. Well be right back.
[00:13:24] Speaker B: Are you wondering what new money problems you might be overlooking in your financial life? If so, weve got great news. Weve crafted the new money new problems gap finder to identify potential weaknesses in your finances in areas ranging from budgeting, investments, insurance, and even the threat your extended family's finances could pose to your household. Please head to newmoneynewproblems.com gapfinder to complete it today. Again, that's newmoneynewproblems.com gapfinder to take the assessment.
[00:14:03] Speaker C: You're listening to the new Money New Problems podcast. Subscribe now at New Money, newproblems.com. welcome back.
[00:14:14] Speaker A: All right, we are back from the break, and this portion of the episode has to do with your romantic partner and or your children. So if you need to listen to this by yourself, uh, or press pause because your partner or your kids are in the car, and listen to it by yourself when they're not in the car, I would advise you to do that. And it's not about blaming, uh, those people who may be in the car on the wall with you. It's really just about you being transparent with yourself before you're transparent with them. Remember that this is not for people who are able to pay off their card in one fell swoop. This is not for people who are not struggling with credit cards. This is for people who are struggling with credit cards. And I can tell you that if you find yourself in that position, one of the things that can exacerbate an already tough situation is if you have multiple people spending on that credit card account. That means a romantic partner. It also means children. It is one thing if you're sitting and you are across from a partner, and you all are both on one accord when it comes to budgeting, when it comes to what you do and do not put on a card. And, uh, also, if you just have the type of relationship with this element where you can talk about finances in a way that's not problematic, and I can tell you, I don't even think that has anything to do with the quality of your relationship. A lot of that is just every relationship has its hot button topics. I can tell you I'm speaking from experience. It has taken my wife and I over a decade of marriage to get to the point where we can have transparent communication about finances in a way where one or the other doesn't feel attacked, I'm talking to myself. There are plenty of times where I'm just sensitive about something that she may bring up, or vice versa. And it has always been a struggle for us to get on one accord when it comes to managing credit card debts that we're both on to the point that we've now gone to a system where she has her card, I have my card, and we have common expenses that we've agreed go on each prospective card. That has made it easier for us because we had to get to the point where we were transparent about ourselves, where we said we are not always on one accord. And having to go through this when a bill is higher than it should be always turns into a blame game, and it's not something that benefits our, uh, relationship. So if we are having trouble getting on one accord, it's actually better that we each put ourselves in a position where we can have a high enough credit card limit on our individual cards to take care of these expenses on my card, these expenses on her card, and have some common ones we put on a shared card as compared to the way that we did it before. If you find yourself in a position where you're not only struggling with credit card debt, but you are having trouble having calm, transparent, understanding conversations with your spouse, then one of the worst things that you can do is have your own card, give your romantic partner a card that's on your credit, but has their name on it, and just set yourself up for the fall, where inevitably there's going to be situations at the end of the month where you're looking at that bill, playing the blame game on who spent what. But even beyond the argument area of it, let's say that you're not blaming each other, but you're just having a hard time collectively figuring out where money is going. It is just harder to manage money when both people are spending off of one card. And when you add in children, it becomes even worse. So I regularly see people who will get a card in their child's name, even though it's attached to their credit. And the reason that they're doing it is, number one, they may tell themselves that they're helping their child build their credit. Understand that if you're not managing that card well, you are not necessarily helping your child's credit. If you're paying on time, you're helping the payment history, but you're not necessarily helping them just because you got a card in their name. The problem when you're doing that is you're also saying, hey, whether you're using this for your cell phone or when you go eat out with your friends, use this card. Or when you are buying gas for yourself, use this card. You're making a tough situation, which is you trying to figure out what's going on your card from your purchases. Even harder to manage because now you're increasing the number of people who are purchasing things that you now have to track, and it can very easily get out of control. I'm not telling you to cut that person off. I'm telling you that I would actually prefer if you're going to assist that child, for you to do it with a prepaid debit card or a secured credit card. A prepaid debit card may be something that you have a stigma associated with because you pick it up at Walmart or the like, but the essence of a prepaid debit card is you give a card that you can have used by anybody that you love, and you can reload that card as needed. And if you're in a situation where you're trying to get out of a tough credit situation, I would much rather you be in exact control of how much you're giving to that family member, in this case, your child, to spend. You want to help them with gas? Okay. Hey, I put dollar 200 a month on this card. You can use that for gas. But now I know that until I reload the card, there's no scenario where they would go above the dollar 200. I'm trying to manage that expense. If you're looking on screen, and we'll put this in the show notes you're looking at from Time magazine m some of the best prepaid cards of 2024. There's a PayPal card, there's a Walmart card, there's a Netspend card. We'll put this link in the show notes. And if you're worried that you might get in a situation or your child might get in a situation where they need to spend more than you have access to in cash to load the card in that point of time, there may be some scenarios where you say, hey, I can cover this. I just can't cover it immediately, but I'll be able to cover it next month. Well, in that case, you might consider a secured credit card. Secured credit card would be something where you get, give an initial deposit to that credit card issuer, and in turn, they give you a credit limit that does not go above that initial deposit. I gave $1,000 with the secured credit card. It has a $1000 limit. Depending on how poor the credit is, it might be that you give 1000 and the credit limit is 500. But a secured credit card would be another scenario that would help your child definitively build credit because there's a limit on what they can charge. If they're paying it on time, it will be beneficial to them. But you can also based that card or your credit and keep yourself out of harm's way. So that was a lot of information about ways and, uh, reasons that you would not use a credit card. I hope this was something that was helpful to you. We may, I'll think about it. We may do an episode on reasons that you would use a credit card. And there are several reasons that it makes sense to use a credit card. But we're going to keep pulling on this thread of high income earners and credit. We'll get into credit utilization, how to pick a credit card and hopefully add some value along the way. I'll see you guys next week.
[00:21:11] Speaker B: From new money new problems. This was the new Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
