Don’t Let A Credit Card Rewards Program Change Your Spending Habits

Nike Air Trainer I

The retro Nike Air Trainer 1 for $110. Tempting to buy with my credit card!

I used to receive a ton of credit card solicitations in the mail until I finally put my address on the do not spam list. Some of the offers really tried to suck people in, such as 6% cash back on groceries, or 3% on gas. Gas and groceries are the two unavoidable expenses for almost everyone and it is brilliant for credit card companies to target these two items.

Even though I have a small monthly grocery bill and only drive about 6,500 miles a year, I was tempted to sign up. The “spend more save more” mentality started taking hold! Then I read the fine print about the 29.99% APR, the limitation on how much I could get back, and the late penalty fee and decided not to sign up. The rewards program didn’t match my lifestyle.

If you are a family of five who spends $1,000+ a month on grocery and commutes 50 miles to work everyday, you probably will benefit the most from a 6% cash back on groceries/3% on gas rewards credit card vs. a city dweller like me with no dependents. You just have to look at the fine print and see what the COSTS are associated with the card.

THE BIGGEST DANGERS OF A REWARDS CREDIT CARD

* Wasting Money Due To Hoarding: A mother who normally spends $300 on groceries spends $500 on groceries to get 6% cash back ($12 on $200 more). Meanwhile, because they spent 65% more than normal, $100 worth of the food goes bad, netting them a $88 loss! Food is perishable folks, unless all you’re eating is frozen TV dinners and hashbrowns.

* Weight Gain: A father who normally spends $200 on groceries starts going goo goo eyed at all the sales in the store because he also has a rewards credit card. He’s now getting double savings on all sale items and therefore he must buy more! His spending goes from $200 to $300 so he can get an extra $6 cash back. Meanwhile, his weight ballons from 160 lbs to 185 lbs after a year because he’s eating so much! Oh, and after a year, he’s spent $1,128 more than he needed to ($1,2000-$78 rewards).

* More Financial Headaches: A young man who always uses public transportation or bikes/walks on the weekends decides to start driving more thanks to a 3% cash back on gas rewards card. As a result, his monthly gasoline bill goes from $150 to $350 because he’s now driving 1.5 hours  north to Napa Valley every other weekend and no longer taking the bus into the city. He gets $6 in cash back for spending $200 more on gas. Meanwhile, he ends up spending $2,400 more a year on gas and another $1,000 for maintenance. Oh yeah, he also gets an extra $150 traffic ticket a year, completely wiping out his $74 cash back!

* Unhealthy Debt Increase: A lady who already has an proclivity to shop online gets an Amazon Rewards Card. Because all purchases on her card lead to a 3% credit towards any Amazon item, she increases her birthday and holiday gift buying from $50 on average per person to $100. She’s already $6,000 in credit card debt with only a couple thousand dollars in savings, but she just can’t pass up getting a whopping 3% back! Over a year, her credit card debt rises to $10,000 as she pays just $1,000 off a month. Meanwhile, the credit card company is making 20% off her debt, happily giving her 3% cash back forever!

* Seeing The World For More: Who doesn’t love airline rewards miles? A person spends so much money to get one free RT ticket for 35,000 miles only to have their airlines raise the cost of the ticket to 60,000 miles! All the money that could have been spent on more productive things. What’s worse, it might take so long to accumulate so many miles that they might expire before he can get there!

YOU MUST GET OUT OF THE “SPEND MORE SAVE MORE MENTALITY”

Please folks, don’t get in the habit of justifying your spending because of a rewards program. You must spend within your means! Spending $100 you normally wouldn’t to get $3-$6 back is dumb. On the other hand, spending $100 that you normally would spend and getting $3-$6 back is fantastic! Know your spending habits and don’t let credit card rewards draw you in and change your habits.

RECOMMENDATION

* Check Your Credit Score: Take a moment to check your free TransUnion credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance! The average credit score for rejected mortgage borrowers has risen to 729 due to more stringent lending requirements. Do you know what your score is? If you don’t want the credit monitoring service, simply cancel before the grace period is up.

Updated 10/27/2014

Regards,

Sam

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    My wife and I are very good about spending the same amount of money regardless of the payment source. Now if you’ve got $100 to spend on a gift and you can get a gift from a category that will get you 5% back versus 1% back, that sometimes comes into play, but that’s just maximizing your value.

  2. says

    Nice photo of the Chlorophyll’s Sam! I was thinking about getting those but no need to spend more money on shoes. I never worry about using rewards programs as I find them to be like those deal sites that get you to buy stuff you really didn’t need in the first place. Spend more save more is just spending more if you ask me.

  3. says

    I am definitely into credit card churning. However, I just do it for the sign-up bonuses and don’t pay much attention to the ongoing reward percentages. I put my regular grocery/gas spending on a particular card until I hit the amount I need to get the sign-up bonus….then I move on to a new card. What happens is that I typically get a new credit card each quarter and cancel one.

    My credit score has stayed at around 800 for as long as I remember despite the fact that I do this. I really don’t care too much about my credit score honestly…but it’s still nice to know that it’s staying high if I should ever need it.

    • says

      Ahh, fascinating Holly! I’d love to read about your credit card churning strategy once a quarter. Congrats on a nice and high credit score! At least you know it, unlike so many others.

  4. says

    While I don’t spend more because of my card, I’ll tell you this: I met potential clients back in “the day” when I was an advisor who TOTALLY went overboard because of reward cards. It’s an ugly problem, and just what the credit card companies are hoping for…..

    While I don’t overspend, I have made sure that all big purchases go on my AA credit card for flight miles.

    • says

      Like an addiction yeah? I used to have a rewards airline card, until it took 50-60% more airline miles points to get a RT ticket, then I said screw that b/c my spending isn’t going up by that much!

  5. says

    I am guilty of using buy 2 get xyz discount every now and then but not so much of buying more to earn a % in rewards points. I purposely only check my rewards points once a quarter or later so that they build up on their own and I’m not constantly thinking “how can i get more points?!”

    I even heard a commercial on TV yesterday encouraging customers to buy more save more. Too many people fall into this trap and let their debt spiral out of control. Balance and budgeting is more important!!

  6. James says

    This happened to me not too long ago. I’m a longtime customer of Discover and they said if I put $1500/mo on my card for 3 months in a row I would get $150 in cash back bonuses. I only spend $1100/mo on credit cards so I declined the offer. A few months later, they came back with another offer saying if I spend $1000/mo for 3 months I would get $150 cash back. It’s been 3 months and I got my $150 without changing my spending habits so I’m glad I was patient.

    I almost view it as a investment… $150 / $3000 total spent = 5% over 3 months = 20% annual. The kicker is that the $3000 is money I would’ve spent anyway!

    • says

      Wow… Discover e-mailed you that? Tempting stuff! I spend $1,000/month regularly on my card, so I’ll have to look into that! In fact, I just had a Discover Rewards Card ad I took off, so now I’ll reconsider.

      • James says

        Actually, I’m not sure if it was a promotional offer for new cardmembers, they sent it via snail-mail. The best promotional one I’ve seen right now is the Southwest Airlines card. I think if you spend 1500 or so in the first few months they give you 50,000 points which is good enough for 2 round trip tickets, probably worth about $700-800 in value.

  7. says

    I don’t think I spend more just because there is a certain reward. I do take on rewards cards to help me get the rewards. For example, I just got a Hilton card for travel because it offers some free weekend nights. That perk alone pays for the card twice over! It will be very beneficial for overseas trips.

    • says

      I guess that really is the benefit of having many cards. Use card for each specific purpose. Just need to keep track. I’m too lazy to do so, which is why I only have one personal card.

  8. says

    I don’t know if I am abnormal or not but I wouldn’t spend more, I would just switch which card I use to pay for the purchase. I could see how some people would get sucked in though and I guess I am lucky I am not one of them.

  9. says

    I just went through the process of researching & signing up for a new rewards card a few months ago. Avoiding the temptation to spend more just to accumulate rewards was a big factor in choosing the card I chose over others that had slightly more appealing rewards benefits.

  10. says

    I use my credit card like cash. If it’s not in the budget I don’t buy it. Rewards, fraud protection and all the other stuff a credit card brings are just perks. I love those sneakers btw.. hmmm

  11. Paul says

    I’m a credit card churner too and I’ll echo what Holly said above. The only time I spend extra is when I buy $500 gift cards for $6 because my daughters day care only takes debit, not credit, and it helps me meet the minumum spend on the credit card. The ROI of each of those $6 gift cards is phenomenal in terms of the resulting plane tickets I get. If I’m not meeting the minumum spend I use a regular debit card. But I want to warn those who want to start churning, you gotta be careful, keep track with a spreadsheet and sign up each card for autopay as soon as you get it, otherwise you could end up spending hundreds of dollars a year in late fees and/or annual fees.

    • says

      I’ve got a “no annual fee” rule now for my personal credit card choices just so I never come up behind. But, back in the day when I was making the bucks, bring on the Black Cards baby!

  12. CMM says

    Agree with Dominique – we use our cards for all purchases (depending on what is earning points that month/quarter) but we budget it out just like cash. Then every month I just transfer the money from checking to the cards and we carry $0 balance. The only time a points system has influenced our spending was during a recent trip to Disneyland. Our Disney rewards card doubled points if we reached $1000 spent in the park and we were at $900 and change. If we hit the $1000 we would get a $200 gift card for Christmas, so that was an easy decision.

  13. says

    When younger, I might have been tempted to spend a little bit more. Today, it won’t impact me at all. Perhaps we CAN learn and improve as we get older! Best to spend how you would normally spend, and not let the rewards impact you in any way.

  14. Sergey says

    I only spend on what I really need, so those credit cards are helpful. Heck, I just got a new BoA credit card with 3% on gas plus $300 sign-up bonus. Why not?

  15. Mike Hunt says

    You need to run for President, Sam. I would LOVE to hear those anecdotes in a debate.

    You could probably make a great analogy to the approach the government takes when it comes to spending.

    -Mike

  16. says

    I think people just spend more money with a credit card period. There is a psychological difference between spending cash and spending credit. Some people say it doesn’t change their spending pattern, but I don’t believe it. I bet if they do a long term study, they’ll see that using credit loosen the purse string.

  17. says

    Sam, I really enjoyed this article. What you are describing is something that doesn’t cease to amaze me: how people start spending more because they will get a very tiny amount back. I always thought that this is really dumb – today I was reading an article explaining that this is the curse of our brains and evolutionary development – we are better with stories than with numbers. Hence we hear ‘cash back’ rather than realise that having spent $200 more than usual just to get back $12 still means we are $188 worse off. Go figure!

  18. says

    I find that owning a credit card can work out well provided you are disciplined in paying back the amount owing in the interest free period. That way you can enjoy the rewards while not paying any interest to the bank.

  19. says

    I do agree with you, people often end up buying this they don’t need because of the reward program without really taking into account the fact they would end up spending more money on unnecessary items than the reward that they are angling for. Nothing is really free in this world, so it’s always better to think twice before committing your finances. We must learn to prioritize our expenses.

  20. Halo says

    We put everything on credit cards and pay off the balance in full each month. I use my American Express Fidelity Rewards card the most. It gives 2% back on everything with no limit and I can directly deposit it into my retirement account. I also use the Discover More and Chase Freedom, but only for items that qualify for 5% cash back or other special offers. I sign up for those “spend $X/month for Y months, get $Z cash back” offers, but switch back to my American Express as soon as I hit $X, and of course pay it in full. I don’t spend more to earn rewards, but I do strategically plan which cards get used where and when. Rather than buying extra things because of rewards, I tend to postpone large purchases until the month that I get 5% cash back on them.

  21. says

    Great post, I fell victim to this during the crazy credit card point’s boom about 7 years ago. I racked up points hoping to score free stuff, I succeeded and got stuff but it wasn’t until later that I figured that my spending was way higher than usual. Oh by the way I lost 33 thousand delta airline miles because of the crazy blackout dates and the company rewards not being helpful at all.

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