I have an aunt who told to me to charge everything to my credit card so I can accrue points. She recently went on an Alaskan cruise for free. Is this a good idea?
Jane Kim – Toronto, ON
Your Aunt’s strategy is a good one ONLY IF YOU PAY OFF YOUR BALANCE IN FULL EVERY MONTH! If not, this sort of behavior can get you in a lot of hot water.
Let me explain. First you need to understand the value of a point. In airline terms, at best 25,000 point will get you a round trip ticket (though it is unlikely to find this good of a deal). If we value this flight at roughly $400, then each point is worth one and a half cents. So, say you purchase $100 of groceries – that means you would accrue 100 points of $1.50 of value. If you do not pay off your balance in full, but instead make the minimum payment, your interest charges on these groceries can cost as much as $10 per month. Therefore, while you may be gaining $1.50 of travel value you are in effect losing $10 per month in cash. In this case you are better of paying for your purchases in cash and saving for your vacation in a separate savings account.
Unless you are capable of paying off your credit card balances in full every month, and I’m not referring to the minimum monthly payments here, but the entire outstanding balance, you are better off paying for purchases in cash. Ultimately, this will keep your expenses as low as possible.