Spend-to-Save Credit Cards: A Good Idea?
Nearly everyone is interested in saving money these days, and many are tempted by the ease of saving through spend-to-save credit cards. But are they really the path to financial prosperity?
Probably not, say financial advisors. In fact, this plan can actually encourage higher spending and more debt.
These plans, such as Bank of America’s “Keep the Change” and Wachovia’s “Way2Save” simply round up purchases to the next dollar and deposit the difference into a savings account.
It sounds good, and it could be good for consumers who pay their balance in full each month. But since savings accounts are now paying less than 1% interest annually, and credit cards charge an average which is now around 12%, or 1% per month, it’s a very bad plan for consumers who carry a balance.
It doesn’t make sense to pay 12% per year on money that will earn less than 1%. You’re going backwards.
But the story gets even worse, because these credit card plans have hidden fees. Keep the Change charges a $5 monthly maintenance fee on their savings accounts – a fee which may be waived if customers maintain a minimum daily balance of $300 or transfer at least $25 from checking into savings each month. Way2Save has no minimum balance, but requires consumers to use the card at least monthly in order to avoid the $5 fee.
The cards themselves may carry an annual fee, further eroding the savings account.
Financial experts advise that rather than putting dimes and quarters into a savings account, consumers who carry credit card debt should be using those extra dollars to pay down their debt. That paves the way for greater savings as interest payments go down.
Another, better way to save, is to change your buying habits and begin recording expenditures.
According to Jerrold Mundis, author of “How to Get Out of Debt, Stay Out of Debt, and Live Prosperously,” people who pay with plastic will spend ten to fifteen percent more than those who buy with cash. With a pre-set number of dollars in hand, consumers are far less likely to spend on impulse purchases, opting instead to say “I don’t really need that.”
Additionally, those who actually record every expenditure for a month or more are likely to cut their spending by five to ten percent. Rather than charging more on a credit card to force themselves into savings, they’re seeing “leaks” in their budget that can be easily plugged. That paves the way for actual savings.
