Thursday, 20 March 2008

Rewarding Credit Card Debt

Cashback, Interest Free, Reward Points - It's a curious phenomenon that we're actually rewarded for going into debt via credit card spending. You'd think with the banks facing a credit squeeze that they'd award prizes for staying debt free. But of course banks wouldn't make any money out of that. So instead we're incentivised to accumulate credit card debt in the hope that we won't pay off all the balance at the end of the month, thereby incurring interest and administration charges and making banks rich while keeping us poor.

You can make reward and cash-back credit cards work for you, but you have to be organised. A direct debit to clear the entire balance each month is the only safe way. For years I was collecting BA miles (a mile for every pound spent) on a British Airways Amex card. Better still once I had spent £20,000 I was awarded a 'Companion Voucher' to swap for a flight equal to the one I was redeeming. So you redeem say 50,000 BA miles for an economy trip to the US and get to take a partner too. All you pay is the taxes and charges on both tickets. At this point in the promotion you could take as long as you liked to spend the qualifying £20,000 - it took me 3 years of asking 'Do you take Amex?'

Then BA and Amex got wise and changed the rules - they'd literally been 'giving flights away'. Now you have to spend £20,000 in just 12 months (you can get cards where you qualify after half that spend - but those cards charge an annual fee - and who pays for credit when its so freely available?). Anyway my partner and I set out to do all our shopping on Amex for 12 months to see if we could manage the £20,000 target. If we failed we still got the miles - so the rule was no additional spending - just what we would have brought anyway.

Using Amex every time you make a purchase doesn't even raise an eyebrow. At the supermarket self-scan its just as easy to feed in an Amex card as a debit card and actually easier than feeding in cash. The bills only a couple of quid? It doesn't matter. "Amex? That'll do nicely."

In fact Amex isn't welcome everywhere. Norwich Union won't insure you with it, Tui won't take you on holiday. John Lewis only recently welcomed the card at their stores. don't, Amazon do. But remember the rule - no additional spending, so you must still take the lowest price you can find, regardless of the sellers' stance on Amex (otherwise the flights aren't quite so free are they?)

This morning at 4.30 am I received an email on my mobile (I love the O2 email to mobile which comes free with their broadband - but I haven't yet quite accounted for the people who email me while I'm sleeping - although to be fair O2 have thought of this with their various divert settings). Normally middle of the night messages are bad news - this was good news; I have just earned my companion voucher. Phew, we only had a week or so to spare. I don't know why 4.30 am was the magical moment. I wasn't even spending, I was sleeping. But somewhere a cyber transaction pushed me into reward land. (It reminds me of my first trip to Las Vegas where the Luxor Casino advertised 'Keno while you sleep' you could literally select numbers to play while you were in the land of nod).

So a year of driving up monthly debt has been rewarded. There was a time when you had to phone British Airways to book Companion Voucher reward flights. The BA sales staff were always sniffy. They were reluctant to carry out the lengthy searches necessary to uncover the scarce few freebie flights allocated. Fortunately BA has removed this final hurdle and now you can search for your own flights online. This is time consuming - but fun if the world literally is your oyster (well, as far as BA flies anyway).

Spending £20,000 on credit has been hard work. I think it actually makes me spend less. When the monthly bill arrives (aside from unavoidable business expenses) you're forced to re-live the purchases and trips which weren't really worth the expense. So spending everything on credit has been good discipline, but I'm not yet sure I'll be playing again next year.

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