Opportunity Cost: Why I Use Credit Cards
A few days ago, I posted a video from a known financial guru on why you should never use a credit card. I, on the other hand, almost always use a credit card. Here is why:
One of the problems I have is that keeping a bankroll on hand feels like a lost opportunity. Whatever pile of cash you have lying around waiting for an opportunity to arise has the benefit of being completely liquid, but it also has a cost. The liquidity is important because when a play arises, you need cash now. Here is what you don’t want to do… Find the opportunity, run to the ATM or the cage to take a withdrawal, and then go back to the machine only to find someone else on the play. This means you need cash in your wallet.
Let’s say you want to keep $1,000 lying around to pick off multipliers, a small must hit, or some other quick hit & run type opportunity. What does that cost? The cost of keeping cash can be measured by the next best use of that cash.
Here are some alternative uses of that money:
- High Yield Savings / Money Market accounts: 2%+ or $20 a year.
- Bonds / CDs: 3%ish or $30 a year.
- Mortgage Pay Down: 4%+ or $40 a year.
- Invest in the S&P: 7%+ of $70 a year.
The list above are all forms of traditional investment and there are various amounts of risk associated with each investment. Most importantly, investments of this nature severely restrict the liquidity of your cash.
Remember, I’m a gambler so the concept of investing and gambling somewhat blurred in my eyes.
Example: Here are the current Vegas Insider odds for the American League West pennant winner:
Assuming you bet the heavy favorite, this futures bet offers you about a potential 24% annual return (assuming there is another equivalent bet available continuously, and that there is no risk in the outcome). Notably, this bet is not a sure thing, so the actual rate of return will be less than 24%, probably even negative if the bookmaker did their job, but these things are still worth looking at. What I’m trying to say here is that the more risk you take, the higher the return potential is. That’s a general rule of thumb that applies to both investing and gambling.
In all cases whether you make a futures bet or use a more traditional investment product, you are giving up liquidity of your bank roll in exchange for returns. You could even add your advantage plays to this list assuming you are able to calculate the return and variance on the games you are playing. Hopefully some or my posts are helping you with EV calculations on some of your bets.
If you are successful you will eventually find yourself in position where you have a surplus of assets and if you are like me, you want more and more cash on hand to attack bigger and bigger plays. As a result, the opportunity cost of keeping cash on hand grows.
There are a couple of other problems with keeping cash.
1) Most home owners / rental insurance policies cover almost no cash in the case of theft. Usually $100 - $500.
2) You have to protect cash. You might need a safe and / or a home security system… Safes are expensive.
3) Bank deposit boxes are cheaper that safes and security systems, but again you lose some liquidity.
4) Cash tends to devalue over time. Inflation is eating away at the value of your cash at an average rate in the neighborhood of 2.6% a year.
If only there was a solution to keeping liquid cash available without getting killed on opportunity costs associated with staying liquid…
Well, here is my solution: Credit Cards… Specifically I look for credit cards with no annual fee, cash back, and a sign up bonus. Here is how this works:
1. I’m going to spend money regardless.
2. I have the cash, so using the credit card as a float has no risk of interest. i.e. I can pay it off at any time.
3. I have enough self-control to maintain my spend patterns between cash and plastic.
Because of the above, I consider a credit card with cash back a relatively risk free return that keeps me completely liquid in terms of cash on hand for a period of ~1 month while producing a rate of return. Said another way, I get more liquidity than any of the options above, but what return to I get?
Let’s look at a couple of little credit cards:
Chase Freedom Unlimited AND Chase Freedom cards
Both are no annual fee cards with a $150 bonus once $500 is spent, and that spend must occur in the first 3 months of account opening. 150 / 500 = 30%... In three months… That’s an annual rate of 120%!
Of the two, I prefer the Chase Freedom card because it has the ongoing benefit of 5% cash back categories. The 5% category for April – June is grocery stores and home improvement stores. Lowes and Home Depot have a wide variety of gift cards available, so basically it’s 5% cash back to just about anywhere you want.
Capital One Quicksilver Rewards and Savor One Rewards cards
Like the Chase cards above, these both have the same $150 bonus once $500 is spent, and that spend must occur in the first 3 months of account opening.
The 1.5% ongoing cash back on Quicksilver Rewards is unexciting to me, but I do like having a card with base 3% cash back on dining out. Because of that, I might favor the Savor One Rewards option here.
Of course, there is no reason not to get them all if your credit will support that…. On that topic, these are cards that require “excellent” credit. Think a 700+ FICO. If you don’t have that score, I would not bother applying because you will take a hard inquiry for no reward. If you don’t have a 700+ FICO, just pay your bills on time and get your card utilization down…. You’ll be 700+ before you know it.
If you apply and get approved for any of these cards though my referral links, I will get some cash back which will help offset costs of running and maintaining this web site.
Chase Referral Link: https://www.referyourchasecard.com/2/PLILTPHGXV
Capital One Referral Link: https://capital.one/2u3lC3Y
If you apply for these cards, read your emails from them. They have each sent me quick little promotions for tap to pay where I can get $15 in cash back for “tapping” the card instead of inserting or sliding the card.
Another way to boost rewards is to use cash back portals like BeFrugal and Ebates. They come with sign up bonuses as well, and if you use my link, they will send a few bucks my way too.
Back to the credit cards… There is nothing worse than thinking you have earned a reward, then learning you have not. I offer these tips:
When picking off bonuses, be careful of rules each bank has on receiving new account promotions. Don’t be afraid to call them and ask if you qualify before you apply.
Read the find print on the promotion. Follow all the rules. You don’t want to lose on a technicality.
Always, Always, Always pay them in full. If you aren’t sure you can pay them in full, don’t use the card. The interest rates they charge will kill any money you earn so quick it will make your head spin.