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Credit Card Secrets: The Real Cost of Credit Cards (& How to Save $$$!)

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Credit Card Secrets: The Real Cost of Credit Cards (& How to Save $$$!)

Table of Contents

  1. Introduction: The Credit Card Debate
  2. The True Cost of Credit Card Interest
  3. Smart Alternatives for Modern Money Management
  4. The Hidden Costs of Merchant Fees
  5. Rewards Programs: Friend or Foe?
  6. International Travel Tips for Credit Card Users
  7. Modern Payment Solutions for 2024
  8. Digital Privacy and Your Financial Data
  9. Action Steps for Financial Freedom

Introduction: The Credit Card Debate

During a recent networking dinner in Guatemala, I had an interesting conversation with a financial advisor, which sparked an important debate: Are credit cards the worst financial invention in human history, or can they be powerful tools for building wealth? The answer lies in understanding how to navigate the complex world of credit cards while avoiding their hidden pitfalls - which, unfortunately, a large percentage of people are losing the battle according to 2024 stats.

The True Cost of Credit Card Interest

TLDR: Credit card interest rates average 23% APR in 2024, with Americans spending an average of $1,657 annually on interest fees alone. For context, if that amount was instead invested for 5x years, at an average 7% return, you would have $11,853 in your account.

The most significant hidden cost of credit cards is their interest rates. In 2024, the average APR (Annual Percentage Rate) stands at 23%, but here's what most people don't realize: this rate doesn't account for compound interest. When you carry a balance, you're not just paying interest on your purchases – you're paying interest on your interest.

And that's not including the interest you get charged on any Late Fees you get by not paying your card on time (typically $20-$50 each month; yes, really).

Let's break down the numbers:

  • Average annual interest paid: $1,657
  • Potential 5-year investment growth: $11,853
  • Potential Returns Lost: $3,568

So looking at it another way, in addition to spending $8,285 in JUST interest over those 5 years, you also had an opportunity cost of $3,568. Meaning if you're the average American, you're losing $11,853 every 5 years just on your interest fees.

If you're looking at where to invest your savings, we use MooMoo ($200 sign-up bonus), good-old WealthSimple ($20 Bonus), and Questrade ($50 Bonus).

Smart Alternatives for Modern Money Management

TLDR: Modern financial technology (fintech) offers alternatives to traditional credit cards, including prepaid cards with amazing cashback benefits and low-interest lines of credit, giving you all the benefits without the cost of credit card fees.

For the tech-savvy Gen Z and millennial audience, several High-Cashback, Prepaid Card FinTech options we personally use (as Canadians) are:

Digital Prepaid High-CashBack Cards:

    • WealthSimple – Cash Back & Great for Investing with CAD
    • Koho - Offers cashback & Line of Credit with minimal fees
    • Neo Financial - Highest Cash Back Option (with specific vendors)
    • Transferwise - Our Pick for International Spending & Cash Withdrawals

The Hidden Costs of Merchant Fees

TLDR: Merchant fees range from 1.5% to 3.5%, often passed on to consumers through higher prices. Internationally, cash payments can lead to significant savings where Credit Card use isn't standard.

This is because, in markets where Credit Card use is wildly adopted (North America for example), it's common practice for companies to bake in the Credit Card Processing fee into the price of the item. Meaning people who use cash or Debit cards (less fees) are still paying for credit card users to use their cards.

However, in places where Cash and Debit cards are still commonly used, they tend to have great incentives to NOT use a credit card. This is because they view those processing fees as an extra cost, not an essential cost. (And they may or may not save money by not claiming taxes on non-tracked purchases, but you didn't hear it from me!)

So if you have a card that you can withdraw international cash with low conversion/withdrawal fees (our favourite is Transferwise), you can save some major money by simply using cash - which probably beats your cashback.

For example, here's what we've found out about merchant fees while traveling:

  • In Guatemala: Businesses add a 7% credit card surcharge (yes, this is normal)
  • In Turkey: Substantial cash discounts, not just street vendors (10-20% or more)
  • In the United States: Gas station cash discounts (for example)

In North America, though, these benefits are scarce, so you might as well get the benefits of using your Prepaid High-Cashback cards.

Rewards Programs: Friend or Foe?

TLDR: Credit card rewards programs often lead to increased spending through psychological manipulation, with rewards typically tied to premium-priced merchants or unnecessary purchases.

Understanding the psychology behind reward programs is crucial for financial independence. Consider this: an 8% cashback at an expensive grocery store might seem attractive, but if their prices are 30% higher than competitors, you're losing money- while feeling like you're saving. Remember, Cash Back incentives at specific vendors are based on deals the companies make with each other; it's not 'free'.

To avoid this, when analysing Cash Back or Rewards options, make sure to only buy things that you would normally buy, and don't get caught up in the hype. A $200 pair of sunglasses, with $40 back, is still $160 you didn't have to spend.

Versus if there is an extra 2% cash back at a specific gas station that is on your way home, and it's prices are usually the same as other Gas Stations, that's beneficial to you - just be sure to pay off the balance every month.

International Travel Tips for Credit Card Users

TLDR: International travelers can optimize their credit card usage through local currency payments and cash alternatives, particularly beneficial for digital nomads and frequent travelers.

Essential tips from a global citizen:

  • Always choose the local currency when paying local businesses (their machines have an inflated exchange rate)
  • Check your Credit Card Agreements for hidden International Transaction fees
  • Understand country-specific payment cultures
  • Use Low-Conversion Fee Cards to save on currency conversion
  • When taking out cash at an ATM, always decline the ATM's suggested conversion fee. The transaction will still go through, and your bank will process the conversion. It is usually 3-4 times cheaper than what the ATM is asking for.
  • Side tip: If taking cash from a credit card, this is a "Cash Advance" and starts accruing interest THAT NIGHT. Be sure to go pay off that your balance right after you leave the ATM.

Modern Payment Solutions for 2024

TLDR: Alternative payment methods including buy-now-pay-later services offer new risks to financial planning and extra costs, under the guise of money-saving opportunities and convenience.

Usually, these services make it much harder to get refunds, have inflated interest rates, and encourage you to spend money you don't have. The easiest way to avoid this is to always pay everything in full: if you don't have the cash, don't buy it yet (mortgages and cars are a topic for another day!).

You can use the Prepaid, High-Cash Back options above to keep you within budget.

Extra: Digital Privacy and Your Financial Data

TLDR: Credit card companies monetize user data through targeted advertising partnerships, making privacy-focused alternatives increasingly important for digital finance management.

In today's digital age, your financial data is a valuable commodity. Did you know that major credit card companies analyze your:

  • Spending patterns
  • Income levels
  • Purchase preferences
  • Location data

And sell the information to advertisers, so they can target you on Social Media? Unfortunately, there isn't much we can do about that in today's day and age. However, believe it or not, a lot of "matching your credit card to your social media account" is tracked through your e-mail account. So one small thing you can do is migrate to a privacy-focused email account.

Privacy-focused alternatives:

  • ProtonMail - Our Preferred Email Alternative
  • Tutamail - another option

Action Items to Stop Accruing Credit Card Debt

  1. Audit your current credit card usage - cut unnecessary expenses
  2. Pay your balance Right Away!
  3. Calculate potential savings from interest/fee elimination (you might be paying more than you get in rewards)
  4. Explore modern banking alternatives/Fintech options
  5. Don't spend money you don't have; use rewards programs as Bonuses, don't be consumed by them.
  6. Implement privacy protection measures (optional)

Remember, the path to financial independence isn't about avoiding credit cards entirely – it's about using them strategically while being aware of their hidden costs and alternatives. Whether you're a digital nomad exploring geo-arbitrage opportunities or a young professional building your financial future, understanding these credit card secrets is crucial for your journey to financial freedom and not spend more than you have to; in fact, we want to invest those savings!

This article is part of our ongoing series on millennial money management and Gen Z financial planning. Stay tuned for more insights on building wealth in the digital age.