Today, while checking my account balance of my Bank of America (BofA) account online I saw some deceptive advertising (at least in my opinion) for a BofA American Express Credit Card.
1.25% cash back on every dollar spent, using the BofA American Express Credit Card.
How many people get caught by just the 1.25% cash back. I would say quite a few. Now I ask would they still be as attracted to this scheme if it said 0.0125 cents back for every dollar spent? Most likely not.
Sit back and think about it for a moment. Let’s say you go out for dinner with your family of four and you spent $65. You would get back at that time 81 cents. Not a big deal. That would not even cover the tip for the waiter or waitress.
Another option to look at it is by your credit limit. Assume you have credit limit of $1,500. This would allow you a cash back of $18.75.
You may say now $18.75 on $1,500 is a nice return rate.
Let’s assume further, you spend every month half of your credit limit ($750) and pay it back before interest accrues and you do this over a period of 1 year. That means you would have spend $9,000 over this one year with a cash back of $112.50. If you would have taking this money and invested it in a 1 year CD, which currently has a rate of anywhere between 1.5% and 2.5% or $135 to $225.
Now we go into the second year. Same spending rate on your credit card. You still would only get back $112.50, which would give you over a 24 month period a return of $225. Since the interest you earned in the first year on your CD is added to your total balance you would have at the end of year 1 an account balance of between $9,135 and $9,225 based on above mentioned interest rates. In Year two you would have saved between $137.03 and $230.62, which would leave you with a total saving over the 2 year period of between $272.03 and $455.62. If you would have saved your cash-back on your credit card (which I know you did ;-)), you would have saved only $225.
Why can’t banks do advertising for people to understand. I am sure they would not get as many cerdit card applications if the add said you receive 0.0125 cents back on every dollar spent versus 1.25% cash-back.