The Truth About Rewards Credit Cards – But, Is it Really True?

by Darwin on November 5, 2009

There was an interesting article going around the Personal Finance circles yesterday about this ABCNews segment entitled “The Truth About Credit Card Reward Programs” and it concluded that people that utilize credit card rewards programs are irresponsible with their cards via the following statement verbatim (I bolded):

“First, studies have shown that credit card users with reward programs spend twice as much as credit users without reward programs.  This leads to increasing your debt level.”

This is completely misleading and sloppy reporting in my opinion. How does one conclude that by putting a greater portion of your spending on a credit card, you’re increasing your debt level?  What is true is that if you spend more than you make and you put ANY of your spending on a credit card, you are increasing your debt load on credit.  But if you spend less than you make but happen to rely on a credit card as your primary means of payment, you are not incurring debt, but rather you’re a saver, right?  Also, when you say “studies have shown”, what legitimacy does that lend?  What studies are they referring to?  Who conducted them and what were the authors’ conclusions?  Not only does the statement lack substance, but remember the tried and true statistical mantra:

Correlation is not Causation

Consider our family’s situation.  We’ve been very disciplined for years and 1 person handles all the finances (me) so I have complete visibility of all inflows and outflows.  I’ve never paid an interest payment on a credit card save for one month when I was in college and messed up – and I’ve never forgotten it, even though it was like 27 bucks.  I hate the idea of paying an above market rate of interest on anything.  Paying 4.625% on a mortgage?  Fine.  Paying 30% to a predatory lender?  No way.  But since that date, we’ve always executed the discipline required to do the following:  Charge virtually everything and optimize cash back rewards each month.  This discipline and opportunistic role-reversal on the credit card companies derives upwards of $500 per year in tax-free income for doing nothing except abiding by good money habits.  If I eat lunch at work, I charge it.  If we make a large purchase, I charge it.  I charge gas.  While many tried and true anti-credit card advocates will certainly cringe, this is how we live and it works for us.  We’re getting paid to exercise discipline.

Now, back to the premise.  Because we charge a high portion of a decent annual income, we are probably charging much more than the typical American.  However, the typical American carries several thousand dollars in credit card debt.  I don’t believe this is an anecdote, but rather, many Americans employ the same tactic we do.While some think they’re getting these great rewards at 1-3% and then they’re paying 20%+ on a credit card are being foolish, many others are never paying a dime in interest, but they are charging a fair amount – and contrary to the article’s statement – They Are NOT Increasing Their Debt Load.

Simply Put:

Let’s take two consumers:
Consumer #1

  • Post-tax monthly income of $2500 and a credit card user.
  • NON-rewards card.
  • They carry debt and hence opted for a lower interest rate card that didn’t provide rewards.

Consumer #2

  • Post-tax monthly income of $5500 and a credit card user.
  • Rewards card holder.
  • They don’t carry debt and utilize the card heavily to maximize rewards.

Consumer #1 takes home $2500 per month, but spends a total of $3000 per month.  Even though they use the card sparingly, they’re still tacking on at least $500 in additional credit card debt each month to make up for the cash they don’t have coming in the form of the paycheck.  They live month to month which draws a hefty toll long term.

Consumer #2 takes home $5500 per month and spends a total of $5000 per month.  They are a net saver, not spender. However, since they seek to optimize credit card utilization, they’re charging $3000 per month and paying it off the next month.

Tell me which consumer you’d rather be? While Consumer #2 is a rewards card holder and charges more/spends more overall, they’re living within their means.  The inverse is true of Consumer #1.

My overall point here is that the type of card you carry does not define how much credit card debt you incur.  In fact, it may be the exact reverse.

Could it be that the type of debt you carry actually drives what type of card you use?  Think about it, if you already have high credit card debt, you’re probably going to seek out a 0% balance transfer or low fee card and not worry about rewards at all.  You may charge as little as possible because you don’t want to add to your existing debt.  However, if you have no credit card debt and don’t really care about interest rates because you have no intention of every paying an interest penalty, you’d go for a rewards card instead of a card with a low rate and no benefits, right?

It is whether you are a net spender or saver during any given timeframe that matters.  The fact that reward card holders charge more is surely a multifaceted complex series of contributing factors that does not necessarily translate into an overall greater level of credit card debt per capita (at least based on the actual data provided in the article).

Informal Poll:  Do you use a Reward Card or Not?  Do you Have Recurring Debt or Not?

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Carnival of Financial Planning
November 22, 2009 at 9:25 am


1 Rainer November 5, 2009 at 11:14 am

I’d disagree: spending on credit cards is debt period. Whether you’re a net saver or not makes no difference. Charging a purchase on a card is short term debt. Yes, you pay it off next month, but what happens when you lose your job, and savings dry up? You might not be able to repay your debt. Murphy’s law says something will happen eventually. Maybe not to you, but to most people like you.

Secondly, you aren’t just taking advantage of a card issuer. You’re taking advantage of the retailers you buy from. You see, those rewards cards cost the retailer more…usually twice as much as a low cost check card. Discover is about three times more. So, a purchase of a hundred bucks costs the retailer 3-4 dollars…roughly the same as your reward. Guess what? The retailer can’t opt out of Visa/Mastercard rewards cards. They take them or none at all. Not too fair for the retailers.

2 Darwin's Finance November 5, 2009 at 5:49 pm

Thanks for your comment Rainer.

I appreciate your lack of support for use of credit cards and their impact to merchants, but it doesn’t actually address the premise of the article. I challenged the notion that “because” you carry a rewards card, you end up in more debt, which the data provided in a prominent news outlet’s release did not support.

Regarding the notion of losing a job, etc., I last month I spent $5000 in cash or charged $5000 on a card for routine living expenses, then I lost my job, there’s no net difference in the outcome. Either way, I’m out the routine $5000 per month and saved the $500 I didn’t spend. If using cash, you are cashless at the end of the month and with no job. If charging, you have the 5K in cash on hand and a 5K credit card bill at the end of the month. There is no net difference to your cash/debt situation either way.

On the retailer topic, are you saying that if one has 2 Visas – 1 is rewards, the other is no reward but with a lower interest rate; that a retailer ends up paying two different fees to Visa? I didn’t think they got to that level of differentiation. I figured Visa has a fee of X and that’s it. I realize you compared to a check card, but the premise of this article was between reward vs. other credit cards. And on a broader basis, whether or not a merchant accepts credit cards is purely up to them. Some that I frequent do and some don’t. It’s really just about business and volume. They know that some consumers won’t shop somewhere where a merchant doesn’t accept credit cards, so they have lower volume. Conversely, we get our pizza from a place that doesn’t take credit cards but they conveniently have a MAC machine right there, of which they probably collect a fee when a customer shows up and then realizes they have to pay cash. In that case, the consumer loses. I think since the merchant has the ability to decide whether or not to accept and which cards to accept, I shouldn’t then feel bad and basically subsidize everyone else who IS using a credit card by paying cash. These fees are fungible.

3 Jim November 5, 2009 at 6:00 pm

I agree that rewards do not lead to higher debts directly.

Spending is higher because people purposefully put more on the rewards cards to take advantage of the reward.

Rainer is right that merchants pay fees for credit card transactions. But the retailers choose to accept the cards and I’m not forcing them. Retailers also save money with credit cards by increasing their sales, reducing employee theft of cash, reducing loss through bounced checks and reducing errors from non-electronic transactions. They have to decide if the card transaction fee is worth it to them and they almost all seem to think it is.

4 Rainer November 5, 2009 at 9:36 pm

DF: I agree that the news report as you quoted (haven’t seen the original) is misleading. And, probably intentionally so. It does seem to imply you end up in more total debt using rewards cards.

I still challenge the article’s notion that because you pay off the card it’s not debt. It is since you haven’t paid the card issuer (the lender) yet. And truthfully, you are advancing next month’s paycheck for this month’s expenses using a credit card (say you spend 3000 this November on the card and 2000 in cash: the 3000 is not billed until December, and you pay it out of your December pay check). In business school, this is considered good money management, but it’s still debt and would show as a liability until paid. Same is true in personal finance, and the debt even shows on your credit report.

While you are right that there is no net difference in your example of job loss, what you have to factor is net effect of having debt. You’ve actually increased the risk of default on that debt when you lose your job (which was my point, not the net cash flow). If you’re living on savings and unemployment insurance, you’re more likely to not pay the full balance of the card to “make it through” until you have a new job. You sound responsible and could handle it, but you’re still accepting more risk by having the debt on the card. Since you are paying October’s expenses in November, when you lose your job on Nov. 1, you still have to pay October’s expenses that were charged. If you had paid cash, those bills would have been paid and you could immediately trim down your expenses to match the unemployment income.

And whether you think you are actually spending the same you would otherwise, it’s the incidentals that get you. I wish I could quote and reference the studies I’ve heard, but basically the reason McDonald’s started the drive for fast food places to accept cards was because they found people spent 50% more when using a card versus cash (this wasn’t based on rewards cards, just cash versus card, including check cards). That was more than worth the cost of accepting cards and the extra time processing it at time of sale. Most people instinctively hang onto cash versus using a card where you can’t feel it slipping away. I’d challenge you to go cash only one or two months and see the difference. My wife and I have seen the difference.

On the retailer topic, I introduced this because you may have implied in the article that you were “gaming the system” since you paid it off every month: making it in essence free money. (forgive me for bringing it up if it wasn’t the implication) However, the bank basically doesn’t lose any money because the retailers are forced to pay it.

Yes, retailers pay different rates on different credit cards. I was pecking this out on my Blackberry, so couldn’t elaborate, but check cards are the cheapest. Then low cost, no reward credit cards are slightly more expensive, and then rewards cards by Visa/MasterCard are next, then Discover and American Express are the highest.

I handle the bookkeeping for my wife’s retail shop. She is charged about 10 different rates for different types of Visa/MasterCard products. Discover has a single rate, and American Express has several tiers as well.

The retailer has no choice in accepting the card tiers. You either accept all tiers or you don’t accept one particular brand’s entire line up. Don’t feel bad for them, because the comment was right that the retailer benefits from accepting the cards. The point is that the banks aren’t losing any money. They’re sending it back to the retailers to pay for. We just have no choice about the separate rewards program cards’ extra cost.

Ultimately, that means you pay for your rewards. You aren’t getting as great a deal. The retailer wraps the credit charges back into the prices for the goods and services. As mentioned, you do benefit from the rewards card versus cash because the retailer’s product is exactly the same price either way, but know that cash customers are also subsidizing rewards card programs. In our area, a chain gas station has started offering lower prices to cash customers…as much as ten cents less a gallon since they save that much on credit card fees.

Ultimately, I’d bet you do spend more at each retailer than you would using cash…you just don’t realize it, and I think THAT is the point to be made.

5 Credit Card Chaser November 6, 2009 at 1:34 am


Great catch and great analysis. I was about to respond to the first comment but you addressed everything and more of what I wanted to say 🙂

6 Cory Aidenman November 6, 2009 at 6:34 am

I think you made some good points, thanks for the simple informative post. Something you mentioned that deserves its own point is reading the comment discussions. 🙂

7 Kevin November 10, 2009 at 5:42 pm

I use my American Express card basically as a debit card and I rack up serious points on it. I also am fortunate enough to be able to put significant business expenses on it (approx $10k / month) which really helps me add up points.

Basically, the result is I never have any debt because I view it with a debit card mentality, and I never pay for travel (air + hotel) because I use points.

Love AMEX.

8 Travis November 18, 2009 at 6:11 pm

I too have only had to pay credit card interest once in my life. I was in college and ended up pay $17 dollars and some change. I’ve never forgotten the event…

I use my credit card for EVERYTHING, which allows me massive cash back rewards and I don’t pay a single CENT in interest. Just as you mentioned… this means I’m getting paid to be wise with my finances!

9 Make Cash Now June 16, 2010 at 2:29 am

Debt is Debt, that is it. If you use a credit card you will go into debt. But as far as using a rewards card as saving money, yes it works. I have used my Amex rewards card for about 2 years now and I have been getting checks each month for around $100. that is all due to me putting every payment and purchase on one card. so in reality I spend $100 less than I would if I paid with cash.

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