Three months ago, I presented an OSU MedNet webcast on Physician Financial Health. Included were what I call the 15 commandments of healthy finances that apply to everyone (not just physicians). One of those 15 is to “Eliminate Excessive Debt“. One of the easiest ways to create excessive debt is to over-spend on credit cards. Doctors are particularly vulnerable to credit card marketing – they spend 8 years taking out loans for college and medical school, then 3 to 7 years in the low-paying job of resident and fellow with a poor credit rating. And then all of a sudden, when they become attending physicians, their income skyrockets and their credit rating increases. They start buying stuff. Fine dining starts meaning more than Chinese take-out. Vacations go beyond 5 nights in a Motel 6 on the outskirts of Myrtle Beach. And the banks that issue credit cards want to make money off of all of those purchases.
How banks make money off of credit cards
There are three ways that banks commonly make income from the credit cards that they issue – late payment interest charges, processing fees to sellers, and annual fees to cardholders.
Amazingly, 50% of Americans carry a balance over on a credit card at the end of the month. The interest on those carry over balances is really, really high – averaging 20% for all credit cards and over 24% for newly issued credit cards. So, the banks that issue credit cards to you are highly motivated for you to use your credit cards because they know that a large percentage of Americans will have carry over balances that they can charge high interest rates on.
Banks that issue credit cards also charge sellers processing fees that are typically between 1.5% and 3.5% on every credit card purchase. So, the more stuff you buy using your credit card, the more money the bank makes on processing fees, regardless of whether or not you ever pay an interest penalty. There is a reason why many stores and restaurants will charge you an extra 3% if you pay with a credit card – they are just passing on their own processing fee expenses.
Lastly, many premium credit cards charge you an annual fee. In exchange, that credit card comes with perks, such as free access to private airport lounges, discounted hotels, free points, and complimentary streaming service subscriptions. For example, the Chase Sapphire Reserve card has an annual fee of $795 and the American Express Platinum card has an annual fee of $695 per year. Credit cards without annual fees have fewer of these perks.
The result is that Americans are inundated with advertisements for credit cards. It seems like you can’t turn on the TV without watching an ad for Capital One or Discover cards. Every time I fly, a flight attendant makes an announcement about the benefits of that airline’s credit card. I seem to get more junk mail than legitimate mail in my U.S. Postal Service mailbox and much of that junk mail is from banks marketing their credit cards.
The banks are smarter than you
On the surface, the points and perks that travel credit cards and cash-back credit cards offer seem like a bargain for the consumer. But here is the catch… the banks know that statistically, the average credit card holder will not use all of their points and perks. Unless you travel very frequently and have long layovers between flights, you probably aren’t going to use the Capital One lounge or the Delta Sky Club lounge very often. And that $200 credit toward dinners at select restaurants doesn’t help you if you don’t travel to the cities where those restaurants are located.
For travel credit cards, most banks will require you to use the bank’s own travel service to make airline and hotel reservations. These services are similar to Travelocity or Expedia and generate commissions when people book travel through them. In addition, the credit card travel portals often charge more for airfare than booking directly through the airline’s website. For example, thepointsguy.com found that the Capital One travel portal was 0.05% higher than direct booking, the American Express travel portal was 1.19% higher, and the Citi travel portal was a whopping 9.32% higher (notably, the Chase travel portal was 0.44% less than booking directly with the airline). If there is a problem with your flight, such as a cancellation or major delay, it is often easier to re-book on a different flight if you bought the ticket directly from the airline’s website versus having bought it through the credit card travel portal.
To make things even better for the bank issuing the credit card, there are often restrictions on how the points earned from credit card purchases can be used. For example, milage points for a travel credit card often can only be used on the bank’s own travel portal or there may be restrictions on which airlines those milage points can be used on. A cash back credit card may issue the cash back in the way of a gift card and banks love to issue gift cards because they know that people don’t always fully redeem them. Maybe the person loses the gift card; maybe they forget about it; or maybe they use $93 of a $100 gift card and the card ends up in the back of a desk drawer with the unused $7. One study found that 47% of Americans have at least one unused gift card in their homes. The bottom line is that when the credit card issuing bank gives you a gift card for your cash back rewards, that bank knows that statistically, it will be keeping a sizable amount of the money on that card for itself.
Are the credit card’s perks and points for stuff you don’t really need?
I have a friend who uses a United Airlines credit card to book all of his air travel. Although he pays $195 for annual fees, he gets priority boarding and one free checked bag on each flight. But now he only flies on United Airlines, even if there are other airlines offering direct flights, less expensive flights, or more convenient departure times. And frequently, he only takes a carry-on bag and doesn’t even have a checked bag. Before getting an airline-specific or company-specific credit card, ask yourself if you really want commit your loyalty to that airline or company.
Most travel credit cards incorporate airport lounge access as a perk. We’ve all had the experience of a flight delay resulting in an unexpected 3 or 4 hour layover – in those times, the American Airlines Admiral’s Club lounge looks mighty desirable. But if the other 10 times that you fly that year you either have on-time 40 minute flight connections or just take direct flights, are you really going to use an airport lounge? Unless you fly frequently using connecting flights (as opposed to direct flights), you probably don’t really need airport lounge access.
Many of the perks of travel credit cards are monetary credits for staying at participating hotels. But is the participating hotel really your top choice for that particular travel destination? And how far does a $200 credit go when the hotel charges $450 a night and an equally nice hotel a few blocks away only charges $250 a night? The same goes for credit cards offering monetary credits for eating at specific restaurants. During your weekend trip to Boston, does the $100 credit for a fancy steakhouse where dinners cost $150 a person truly have value to you when you were really in the mood for a small out of the way Italian restaurant where dinner and a glass of wine will run you $35?
Cash back credit cards often advertise 5% cash back on selected purchases, for example, restaurant dining. But a meal out at a nice restaurant is a whole lot more expensive than cooking at home or a burger at your local pub. So, are you spending 30% more than you normally would in order to get that 5% cash back? The 4% cash back on groceries might sound pretty appealing until you realize that it is only for the first $6,000 in grocery purchases each year and then after that, the cash back falls to 1% on all of your purchases for the rest of the year. The 8% cash back promise on entertainment purchases sounds great on the surface, but is it encouraging you to buy tickets for professional sports event, concerts, and Broadway shows that you were not really all that interested in attending and wouldn’t have gone to if you didn’t have that credit card reward?
Have you ever heard someone say that they only went to some restaurant or bought tickets for some event because they needed to use up their points? It happens a lot more often than you think. Every U.S. dollar bill says “This note is legal tender for all debts, public and private” – the same is not true for credit card points and miles.
So, what should a responsible person actually do?
- First, and absolutely most important is to always, always, always pay of your credit card in full at the end of each month. The interest penalties on a late payment will wipe out any points or cash back benefits in no time at all. Everyone needs to have at least 3 and preferably 6 months of living expenses in an emergency fund held in cash (checking account, savings account, or money market account). Always set your credit card up for autopay from one of those cash accounts. Personally, I prefer to manually authorize each credit card payment from my checking account every month so that I can be sure that I am keeping enough money in that checking account to maintain a positive balance. But I have those credit cards also set for auto payment so that if I forget to manually authorize a payment one month, I have a back-up to ensure that my entire credit card balance gets paid off and I don’t generate any interest penalties.
- Prudent credit card use starts with a budget. Before you apply for a credit card, create an annual budget to determine how much you will be spending on major categories like groceries, travel, utilities, entertainment, etc. Then stick with that budget and do not be tempted to overspend in one category just because of the allure of getting more points or cash back rewards. This requires you to monitor your expenditures regularly but fortunately, most credit cards will allow you to see what category of expenses you’ve been generating year-to-date so that you can track your expenses to be sure that you are staying within your budget for each category.
- Sometimes simple is best. A 1.5% or 2% cash back on everything credit card can be used for most purchases. You could probably save a few hundred dollars each year by having a handful of cash back credit cards that each offer higher cash back percentages for various categories of expenses, but who wants to carry around 10 credit cards and then try to decide for each purchase at the grocery store, gas station, and fast food restaurant which card is “best” for each individual purchase. It is kind of like being a compulsive coupon clipper – do you really want to devote that much time and effort to over-think every purchase? Ideally, that cash back credit card should allow you to transfer the cash back balance directly into your checking account, thus avoiding the dreaded gift cards or credits toward purchases at a particular store. Have one simple workhorse credit card that is your default card for most of your daily purchases.
- Expand beyond one credit card strategically. Experian reported that last year, the average American had 3.84 credit cards. I was listening to an interview with a travel guy who has 15 credit cards! Having more than one credit card has several advantages – say you lose one, or you have a big purchase that reaches your monthly credit limit on one card, or a card gets stolen and you have to freeze purchases to that account. But after choosing your workhorse credit card, other cards should be for specific categories. For example, if you live in Atlanta (a Delta Airlines hub), are self-employed, and have to travel frequently with a lot of equipment for your work, then having a Delta SkyMiles travel credit card that gives you a free checked bag and doubles your SkyMiles per trip can save you a bunch of money without steering you toward purchases of stuff you don’t really want. If you are moving into a new home and plan to buy a lot of new furniture to outfit the new home, you can save a lot of money by opening a credit card account with the furniture store but then only use the card for those specific purchases. If you buy lots of stuff from Amazon and regularly shop at Whole Foods, then an Amazon Prime VISA card for those specific purchases may make sense. But if you have too many of them, it gets harder to regularly monitor them – if someone steals your credit card number and you are not monitoring that account regularly, you can end up with thousands of dollars of charges that are not yours. And if you have too many credit cards, it is easy to forget about one of them when it comes time to pay it off at the end of the month. One credit card is probably too few but six is probably too many for most people.
- Think critically about credit cards that have an annual expense. There is a reason that banks make money on these cards and that reason is you and the way you actually use those cards. Is unlimited airport lounge access worth it if you only use an airport lounge twice a year and then have to pay $50 for your spouse to get in with you? Will you actually use the hotel and restaurant credits every year? Many people open elite credit card accounts such as the Chase Sapphire Reserve card or American Express Platinum card because of the perceived status symbol that these credit cards imply. But do your friends and neighbors even know what credit card you use for on-line purchases and if they did, would they even care? Don’t open a credit card with an annual expense unless you are absolutely certain that the perks that come with that card are for things that you would be buying anyway or for things that you personally really, really value highly.
- Are there hidden charges and rules that will wipe out the benefits of a specific credit card? A card with a 2% cash back reward sounds great until you realize that there is a 4% foreign transaction fee. That big vacation to France that you are planning could wipe out most of the cash back reward for the next 6 months of credit card purchases in the U.S. Alternatively, are there hidden benefits that favor one card over another? For example, does the credit card provide car rental insurance that allows you to avoid purchasing costly insurance from a car rental company? Do the points expire after 6 months if you don’t use them?
- Life is not a game of whoever gets the most credit card points wins. Some people try to get as many credit card points and miles as they can because it makes them feel important. It is kind of like playing only one video game exclusively, just so you can get higher and higher personal best scores. But those points and miles can come at a cost – the cost of free choice. The bank issuing the credit card is directing your choices by offering those points and miles for specific purchases.
- If you open a new credit card, can you get rid of an old one? Closing credit card accounts is inconvenient at best and frustratingly complicated at worst. After you have had a credit card for a few years, life happens. Maybe you rarely use the airline that you originally took out a card with. Maybe you no longer travel for work and the benefits of your travel credit card no longer exist. Maybe the card’s annual fee increased enough that it is now costing you more than the benefit you are getting from it. Maybe a similar credit card has a great initial offering if you open a new account with them. Or maybe you’ve been using a different credit card because the points or cash back rewards are better than an older credit card. Excess credit cards are excess baggage in your financial life – if you are not using one of them, get rid of it.
The house always wins
The reason that banks spend tens of millions of dollars advertising credit cards is because they know that they are going to make hundreds of millions off dollars off of the consumers who use them. Even if you are happy with your credit card giving you 2% cash back on everything, realize that the bank is charging everyone you buy stuff from a 3% transaction fee and those sellers are going to then increase their prices by 3% to cover their costs. But in a society that is becoming increasingly cashless, having credit cards are pretty much a necessary part of life.
The banks that are tempting you with generous-sounding points and cash back credit card offers are not doing so out of benevolence because they want to do something nice for you. They are making those offers because they know that in the long run, they are going to benefit from you far more than you are going to benefit from them.
As a college psychology major in the 1970’s, I studied B.F. Skinner’s theory of operant conditioning. In a nutshell, this theory explains how complex human behavior is shaped by systems of rewards. When it comes to credit cards that offer points and miles as rewards, we are being operantly conditioned to make certain types of purchases. A cynic would say that the banks issuing credit cards are manipulating consumer behavior by directing cardholders toward specific purchases and encouraging cardholders to make more and more of those purchases. An optimist would say that cardholders are getting free or discounted stuff. A realist would say “Take the free stuff but be aware that you are being manipulated“.
July 30, 2025
