There's no such thing as a free lunch

Classic, I know. But still true. And now it's popping even more. Anytime you hear the word "Free", you should laugh. ESPECIALLY when it comes to credit card rewards. You can call it "sky miles", "cash back" or "points", but it all boils down to the same story: The credit card companies want you to think that you're getting something for nothing. They want you to think it's a bribe. "Use our card, and we'll give you free ____[miles, points, cashback]_..." I know all of you are too smart to fall for that. It definitely costs you to use that credit card and rack up those skymiles. And I am certainly not referring to any finance charges you may or may not pay each month. So, don't think that just because you pay off your whole bill each month that you aren't paying for those rewards. You are! They're hidden in a little thing I like to call: the merchant discount.

The merchant discount is the fee a merchant pays to a credit card company for the right to collect payment from you through their credit card system. Each time you swipe your card at Nordstrom's, they have to pay a percentage of your purchase to American Express. Then, American Express turns around and offers you a credit card that comes with "rewards" that are...amazingly!...a percentage of the dollar value you spend. Doesn't this sound like a transfer of wealth? American Express is taking from the rich (Nordstrom's) and giving to the poor (you!) through the system of credit card rewards.

Now here's the kicker...who pays for it? Well, think about it like this: Nordstrom KNOWS that you love to use your credit card, and that you really WANT to use your credit card, but it costs them the merchant discount each time you do. So? They increase the price of the goods. ALL the goods in their store (since American Express has mandated that no one can charge a surcharge for using their credit card). So, a person paying cash pays the same price for a pair of boots as a person using an American Express card. But the American Express cardholder turns around and collects "rewards" based on the amount of their purchase. This could be seen as a discount on the boots. (I.e. They get the boots, but they also get a small benefit from the rewards, so the net price of the boots is lower than someone who paid with cash).

The moral of this story is: As long as credit cards offer rewards, EVERYONE should be using a credit card! Otherwise, the cash payers are paying a higher price than the credit card buyers. So run out and find the card that comes with the best rewards at the lowest annual fee you can find, and once a year you can take a trip with a free airline ticket, or get $200 cash back, or get a gift card to Bed Bath & Beyond, or some other "free" lunch. Use your credit card as long as there are rewards! Because if you pay with cash, all you get is....lunch.