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Credit Card Rewards Hurt Your Bottom Line

This article was written by in Credit. 26 comments.


I’ve been a proponent of cash-back rewards credit cards for a while. My theory, or perhaps my excuse, is that if I plan on spending money and can do so with either cash or a credit card that offers rewards, I might as well use the rewards credit card to damage my bottom line less or take advantage of a free flight I would have otherwise paid for.

This is nice in theory, but there are some drawbacks. First, there is a negative effect on retailers. Rewards credit cards cost more to process than standard credit cards, which will eventually drive up the costs of products for all consumers. The more the public uses rewards credit cards, the higher products must cost in order for businesses to maintain the same profit margin. The fees are outlined in the merchant agreements available publicly from Visa and MasterCard, so the higher cost to the retailer is not a secret.

On a personal level, if you carry a balance on your credit cards and pay interest, your costs to use the card will outweigh the cash-back benefits or other rewards. Even those who pay balances in full every month, buying only what could be covered with cash, will spend more simply because they are using a rewards credit card. A recent study conducted by the Federal Reserve Bank of Chicago shows that rewards programs increase spending with the more beneficial credit card, but this is partially offset by a decrease in spending on other cards. Consumers who take advantage of cash back rewards programs increase their total debt after being the program, so that means there are enough people carrying balances on these cards to make the programs less worthwhile.

The study does not show if the increase in spending with a rewards credit card is offset by a decrease in spending with cash, however.

Nevertheless, users of rewards credit cards should carefully consider — on an individual level — whether their spending has increased as a result of the appeal of a rewards program. As part of taking control of your finances this year, tracking and analyzing your spending is one of the most beneficial projects you can do to help your bottom line. It doesn’t have to a be a big project, but you should know whether your favorite rewards program is actually helping or hurting your finances, regardless of how you feel when you use your miles for a free flight or receive a check for your cash back.

You can look at the studies like the one by the Chicago Fed. It’s generally safe to assume that any one person (you) is just like the typical consumer described using averages, but I do have a problem with blanket statements. No study but your own analysis can tell you what happens with your money; studies and surveys can only help you understand what is typical, offer warnings, and raise awareness.

Published or updated January 17, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 26 comments… read them below or add one }

avatar twiggers

After successfully paying off ALL of our credit card debt (67,000 worth) we now use a rewards card for EVERYTHING. The card is FULLY paid off every month. Have I noticed an increase in our spending? No. I have noticed an increase in the CC balance every month because we don’t use any cash or debit cards anymore. We were using a points card, but are now focusing our energy on our airline card since travel is our priority.

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avatar Steve

One time I paid for a dinner I wouldn’t have (I would have let my dining companion pay for his half) to get the reward points. It was a cheap lesson at $20.

The increased merchant fee is a tragedy of the commons problem – as an individual, I am better off if I get 1 or 2% back (even at a cost to the merchant), but as a community we are all a bit poorer.

How much higher are the fees for merchants when someone uses a reward card? More than the cost of the rewards?

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avatar Luke Landes ♦127,505 (Platinum)

The typical swipe fee using for a non-rewards Visa card at a typical retail establishment (CPS/Retail – All Other) is 1.54% plus $0.10, while using a basic rewards card in the same situation would cost the retailer 1.65% plus $0.10 (source: Visa Interchange Rate Sheet, October 2010). This increase won’t cover the cost of the rewards, so Visa must have data to show that offering rewards increases revenue from a different angle — larger purchases or more purchases.

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avatar Steve

That’s not a very big difference. The transaction volume would have to be more than twice as much (more transactions, larger transactions, or both) for Visa to break even giving 1% cash back. It seems like the same logic would apply to a merchant – if the average rewards card transaction is 1.65% or so larger than the average cash transaction, they make more money. (Depending on their profit margin.)

Of course any extra money the merchant and Visa make comes from the consumer. So maybe you’re right after all that us consumers tend to spend more when using a credit card.

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avatar nimrodel ♦42 (Newbie)

I tend to disagree that using a reward card affects my spending in any way. Of course, I only ever redeem my points for cash. Why would I spend an extra $100 to get something I didn’t really need and $1?

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avatar Kyle

I have no doubt that rewards increase my spending somewhat. I’m not conscious of it, but I’m sure it happens as I’m sure it happens to most people. C’est la vie.

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avatar Will @ HackingTheBank.com

I’m not sure if the rewards per-se alter my habits because I am generally already planning to use the credit card, and then make a selection of which card to use based on the rewards. However, I am not under the illusion that paying with credit doesn’t lead me to spend more. The effect on the brain of spending cash vs. credit has been shown in a number of studies. Cash, as one would guess, is more painful, and thus, causes you to spend less on aggregate.

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avatar rewards ♦31 (Newbie)

I’m more than happy to receive that $200 cash back check every year just for using my rewards card to pay off my necessities (groceries, gas, utilities, and insurance premiums).

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avatar krantcents

Users of credit cards must act responsibly! Credit cards represent money, in many cases it is a loan because it is not paid off at the end of the month. Whether you receive cash back, frequent flier miles or some other reward, it is still a credit card.

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avatar gotr31 ♦224 (Cent)

I agree, and I think it takes a great deal of control and tracking by the individual to keep on top of their spending. Not everyone has that kind of responsible attitude.

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avatar MR ♦295 (Nickel)

As a user for reward credit cards for more than 10 years, I have to say that at first I did spend more than I would have if I paid with cash instead, but just a little. However, it didn’t take us long to realize this (via a spreadsheet and various credit card statements) and to take the correct actions to counter the increase in credit card spending.

I think it really does depend on the individual as to where the rewards cards make sense for them or not…

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avatar Harm

Yeah, I spend more on the card….I just don’t use cash, anymore.
If the rewards are there, I’ll take ‘em, the concept won’t necessarily be around
forever.

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avatar twiggers

I forgot to say: Last year alone I was able to cash out $750 and used that amount to pay the service fees on two first class tickets to Europe (current value of ~ $30,000 the last time I check the prices on the airline website). I’ll continue to do that every year ;-)

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avatar skylog ♦368 (Nickel)

i see the logic in the point, and i would tend to agree that for “most people,” this is probably the case; however, in my expereince, i go out of my way to use my rewards cards for everything but i pay the balances off each month. i gladly accept the rewards. as others have stated, it is a case of something for nothing for me, and i will take advantage of that as long as the rewards remain available….but that is another story.

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avatar DonnaFreedman ♦90 (Newbie)

I’ll take the rewards, too, because I’m one of those folks who DOES scrutinize purchases carefully and never carries a balance. Maybe this is the opposite of what Dave Ramsey calls “the stupid tax” — it’s the “smart reward” for using the right card to optimum advantage?
The free airline tickets to see family and friends in Alaska, and the free gift cards that I give for Christmas are a nice perk.

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avatar jim

I’m not concerned about the extra cost to retailers. That cost is pretty marginal. And any business taking credit cards has decided that doing so is worth it to them. Its not my job to make sure retailers are profitable or that my fellow consumers all get the same deals I get. Businesses can sort out their own profitability. By the same logic I have no problem using coupons or negotiating on some purchases which will also reduce business profitability.

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avatar SavingMentor

This is blasphemy! :)

Ok, not really … but until we convince everybody that credit cards are a bad thing and to cancel them all then it just makes sense to have a rewards card if you can control your spending.

I like how Steve put it “tragedy of the commons problem”. I had never heard that expression before, but it definitely applies in this situation. We have to take advantage of the evil because if we don’t we know that everyone else will and we will be the one stuck subsidizing everyone else’s rewards.

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avatar TakeitEZ ♦549 (Dime)

I agree with most of the posts above that if you are responsible credit card user then using a rewards card is a no-brainer.

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avatar Valerie

I have NEVER paid less than the full amount monthly on any credit card, and we shop for everything pretty carefully, especially big tag items. Credit cards are much handier than cash when it comes to any time there is a return or product quality problem. They also provide good records for tracking your expenses, which more people should do.

We don’t use debit cards, except in one case where the bank required it for a higher interest rate on a savings account. We’re required to use at least 5 debit charges per month, and that’s ALL we use it for. I consider debit cards much riskier re ID theft, and you don’t get the float of a credit card.

We take advantage of cash back whenever possible. It’s getting to be more of a pain now that many cards change the items on which you get cash back quarterly. Sometimes it’s not worth the bother of remembering which card is for dining out this month and which for drug stores.

I think the issue is to educate young people that credit cards do NOT have to be a source of lending but should be used on a cash basis. Let’s face it…this country has been debt-addicted since the first incident of buying “on time” – and there were no credit cards back then!

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avatar Siwan ♦155 (Cent)

It’s very low tech, but I tape a small sticky in my wallet that shows which cards have the 5% categories. That way I know which card to use if I’m at the grocery or drug store, etc. I’m going to try and redeem all points for restaurant gift cards to use in place of our dining out budget and use the cash as a slush fund

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avatar slug

I’m working on an app for that. I think it will be used by about 5 people worldwide, but if it helps me avoid the sticky note method, it’s worth it.

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avatar eric ♦1,549 (Half-Dollar)

It just depends on the person I think. Most Americans are too swipe happy and don’t have the discipline for credit. I like using my cards knowing the protections and security they have over cash.

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avatar 4hendricks ♦248 (Cent)

To everyone I may be hurting by using my rewards cards, I am sorry, I don’t plan on stopping. I don’t find I spend more, and the rewards pays for our Christmas. (And we are very generous to others at Christmas)

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avatar Luke Landes ♦127,505 (Platinum)

The point is you could be hurting yourself without knowing it.

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avatar slug

I just don’t believe that. First, that Chicago Fed study does not speak about the sub-sample of credit card users who pay off their cards every month, which is the only relevant sample set to me as a credit card deadbeat who never carries a balance. Second, that study’s sample set is almost a decade old. I would argue that consumer habits are non-static and change over time, especially in response to economic events like those in recent history. Finally, even if there is greater price inflation as a result of reward card use, the higher prices experienced are offset by the rewards, esp. for those of us who pay close attention to 5% rotating programs and the like. The price increase is much more likely to hurt the common man or the Dave Ramsey crowd than me. The only way to defend against these higher prices is to play the game, unless you can get everyone to walk away from their credit cards.

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avatar Jeff

I use cards for everything, so I don’t even see the point of maintaining ANY cash, unless I need some on-hand for special circumstances. Before I started taking advantage of CC rewards, I used my Wells Fargo Debit/Credit Visa for most of my everday purchases, and would only use my Chase Visa for large and/or emergency purchases. Now I use my rewards cards for my everday purchases, and try to pay cash for my larger purchases (pretty much the opposite of what I was doing five years ago). The rewards stack up fast, and I will admit that the first year or two that I started doing this, I was actively seeking out ways to get my double and triple points (thereby probably spending more). But I don’t even think about it anymore. Now I just use those cards AS IF they were debit cards, and usually don’t even look at my rewards until around the Holidays each year. My two main cards are an Amex Premier Rewards Gold card and a Chase Visa Amazon Rewards card. The former I use for all of my gasoline, groceries and the occasional airfare. The latter I use for all of my Amazon purchases (obviously). But since a very large portion of my entertainment budget is spent at Amazon.com anyway, that card makes good sense for me and combines well with the linked rewards from the Amex card. I think I have a good little machine going for my own situation, but I know that’s a very selfish way of looking at it. I never really stopped to think about how my own credit fringe benefits effects the consumer community as a whole. Thanks for the article, Flexo!

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