If you have a credit card that gives you 1% cash back on everything you buy, and you pay off your balance every month... It's like having a 12% APY Savings Account...
I wish I would've realized this sooner...
- Thread starter mh47g
- Start date
That is incorrect. Let's say I put $1000 in this fictional 12% APR savings account in January and leave it there for a year. At the end of the year, it will have compounded to:
1000*(1 + 0.12/12)^12 = $1126.83
I have made an assumption here that the account compounds monthly, which is incorrect. Every one I have seen compounds daily. However, I did it that way to make an easy comparison with a credit card that pays a certain percentage of cash back per month.
Now let's say you buy $1000 worth of stuff in January and get 1% cash back, which is $10.
$126.83 >> $10
The OP is correct. A 1% credit reward is the equivalent of a 12% APR for The month you made the purchase
Example: 1000 in a 12% savings for 1 month = (1000*.12)/12 = $10
1000 purchase (1000*.01) = $10
I think the financial impact of a 1% cash-back card is more accurately described as a 1% discount on everything you purchase with it.
Its in no way equivalent to a savings account or other investment, because after that first month, your investment $ is making you even more money while your credit card cash-back is not, as it has already paid you its one time payment.
Its in no way equivalent to a savings account or other investment, because after that first month, your investment $ is making you even more money while your credit card cash-back is not, as it has already paid you its one time payment.
Right, but the difference here is that you can't buy groceries by putting money in a savings account. If you're going to be spending money, you might as well find a card that's going to pay you to do it and get free money out of the deal.
You're comparing two totally opposite things here.
126$ over the year w/ the savings account using simple interest (done monthly not daily). He spends 1000$/mo w/ his credit card and gets $10 back. Thats 120$/yr. It doesn't compound but it's there.
mh47g never said it was exactly like a savings account but he likened it to a savings account.
Special K, you used APR, not APY... tisk tisk. Banks advertise the APY. True mh47g said APR (as he is talking about a credit card which advertise APR's) but I'm positive he ment a 12% APY savings account.
"I think the financial impact of a 1% cash-back card is more accurately described as a 1% discount on everything you purchase with it."
Thats how I view it. OP simply wanted to look at it from another angle.
On your part, yes, thanks for playing.
mh47g never said it was exactly like a savings account but he likened it to a savings account.
So... what's your thought now?
Special K, you used APR, not APY... tisk tisk. Banks advertise the APY. True mh47g said APR (as he is talking about a credit card which advertise APR's) but I'm positive he ment a 12% APY savings account.
Still confused?Originally posted by: nwfsnake
Or was he, hmmmmmm. He said its LIKE a savings account in that he saves money. You can have a savings account, put $18 in on the 1st and by the 30th have spent it.... Not a very useful savings account but will you say its not a savings account?
"I think the financial impact of a 1% cash-back card is more accurately described as a 1% discount on everything you purchase with it."
Thats how I view it. OP simply wanted to look at it from another angle.
My thought is that these are really different things, and it can be dangerous to compare the two. It can make the decision between spending vs. saving harder- if something is cheaper, we tend to justify buying it even if we don't need it- especially with the mentality of "This is just like a 12% APR saving account since I'm using a cash back card!" (even though, as mentioned, it's more like a 1% rate compounded monthly only for the month the item is purchased).
The thought process with a cash back card should be more akin to: "I am going to buy this item, so I should pay the lowest amount I can. I have determined that the present discounted price of item is worth more to me than the future compounded earning of saving the equivalent item cost". Of course, if I ever talk like that in my head, I should shoot myself, but you get the idea.
ive been doing this since I got my first card (this was the reason I chose it actually). I pay off the balance each months and have stopped carrying/using cash. I funnel all my spending through the card and am saving a percentage on everything I buy. There was a promotion that I took advantage of over the holiday season, 3 (or cant remember now) percent back on everything. saved a buttload on my christmas, birthday and vday stuff
gorcorps
aka Brandon
- Jul 18, 2004
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You just compared an entire years worth of earnings in a savings account vs. one MONTH on a credit card. $126.83>$120 still, but it's not near as different as you tried to make it seem. That's a blatantly obvious misstep you made and I can't believe you got some people to believe you.
You were going to spend that $12000 anyways (i knew this arguement was going to come up).
True, but people that think like that are not savers anyways. People that are savers but never looked seriously at the 1% discount can look at it in this light and say "maybe I should spend a little time and change credit cards".
For credit cards that give miles, thats 1% too, 1 mile for every $1.00 you spend (.01). But if you fly a bit, may as well funnel that money to flying.
Its still absolutely 100% NOT like a 12% APR by any stetch of the imagination. IF you wanted to look at it in terms of APR it would be 1%. Trying to say its 1% in one month and therefore 12% total is retarded because you only get the 1% that month and then 0% the next 11 months, so its a total of 1%. OF course the whole idea of thinking of it as an APR is retarded anyways since this is based on how much you SPEND not how much you save. In the end it is a 1% off everything you buy plain and simple, if you buy 20,000$ on your credit card in a year you get 200$ back. Thinking of a credit card as having a large advantage is rather silly here, sure 1% can add up, but in the end its still only 1% which is more or less neglidgible.
I caught the $1126 mistake earlier and edited it in my post. You are correct that the earnings of the savings account would only be slightly higher than what you would gain in cash back from the credit card.
What I was trying to point out is that you only need to deposit $1000 in the savings account to earn the same amount that spending $12,000 on the credit card would net you at the end of the year. Typically when comparing investments or financial decisions, you start with a fixed amount of money and see how much you would end up with in each case after a fixed period of time.
It isn't really fair to compare a savings account to a credit card's cash back rewards. It really depends on whether or not you would have spent that $12000 in any case. I have read articles stating that many consumers actually end up spending more when they have a rewards credit card because they get caught up in trying to get as many reward points/dollars/miles/etc. as possible.
gorcorps
aka Brandon
- Jul 18, 2004
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True, to both of you. It's not comparable to a savings account in that it doesn't just accumulate, you have to pay for it. BUT if you happen to be one like me who used to use a debit card all the time its worth it just to use a CC and pay it off every month. You spend the same, don't get charged a %, and end up getting rewards or money back.
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