Friday, June 30, 2006

Spend and Save - Credit-Card Insanity

The marketing tactics that credit-card companies use never cease to amaze me. One that recently caught my attention for its complete disregard of reality is the American Express "One" Card. The major selling point of this card, from what all their advertisements focus on, is the "high yield savings account" that comes with it - well, that comes with your spending when you use this card.

Yes, that is right, their marketing strategy for this credit-card is quite literally "spend and save". Wow! Now that sounds like the American Dream! To save money, all I have to do is spend. And, the more I spend, the more I save! I must be dreaming! Funny thing is, this is logic-sequence is basically what the TV Commercials sound like. They keep stressing how contributions to a "high yield savings account" are tied to your spending. And, they show people running around spending money on everything imaginable, and then checking out their "savings statement" that results from this spending. Give me a break!

Ok, let's look at the reality behind this offer. First, their "high yield savings account" currently pays a whopping 4.0% interest rate, which quite honestly isn't that bad. But, if you are a typical credit-card user and carry a balance, that "high rate" doesn't seem so high when compared to the current interest-rate you will pay Amex on you balances (Prime Rate + 5.99%), or 13.24% (Prime is now at 8.25%). Perhaps a better way to say this is that if you carry a balance, you will currently still be paying Amex a net 9.24% on every purchase! There are other caveats to the plan that can further reduce your "savings" as well.

So, keep in mind, the fact is that as long as you spend money, you are not really saving money! Period. The only persons that should consider the Amex deal are those that carry no balance on their credit-cards; and, these are the only people that can make any credit-card offer really pay off.

A REAL "savings plan" is just that: save! In other words, cut your spending and place the money into a savings account or other investment vehicle. Plenty of good money-market rates are out there that beat Amex's "high yield" of 4% too. ING DIRECT currently pays 4.35% on their money market. Various banks in my area are running promotional short-term (13 month or so) CD rates of 5.25-5.35% now. Not bad for short-term yields.

But, if you really feel that you must spend to save, I'll make you a great offer. For every $1000 you send me, I'll put 50% of it into a high-yield savings account for you! Send as much as possible, because the more you send, the more you save! :)

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