One of the questions I get almost every time I speak on stewardship is around the use of reward cards. You know, the ones where they give you rewards points or cash back for spending money through them. As a general rule I am against consumer debt, credit cards, car loans and the like, but there is always someone who asks me about using cards for the cash back or for the rewards. They feel they can game the system somehow and make the banks pay.
My answer is as straight…absolutely depends. There are some folks who are diligent enough to pay off the card every month without fail. Those folks will make money from reward cards in the long run, but it doesn’t take much to ruin that streak and cost you all your winnings. Just like Vegas the house always wins.
A study of how rewards cards affect behavior in 2010 found that even a reward as small as 1% can change consumer behavior:
…consumers generally spend more and increase their debt when offered one percent cash-back rewards. The impact of a relatively small reward generates large spending and debt accumulation. On average, each cardholder receives $25 in cash-back rewards during our sample period. We find that average spending increases by $68 per month and average debt increases by over $115 per month in the first quarter after the cash-back reward program starts.
We all assume we are the exception to the rule, but that is not often the case. Banks spend millions of dollars to analyze the results of the incentives they give. That is why make the profits that they do.
I am not that person. I can do things if they are automatic. We use a reward card to funnel a few bills through that I automatically pay, but if I use it for anything else I end up paying interest even though I have the money to pay it off. I just like having the money in the bank more than not paying interest even though I know it is the wrong thing to do.
However, if you pay off your bill every month without fail you can make a little extra money with a reward card. It may just be best to ignore the fact that it is a reward cad and not try to game the system or you may find that you are the one being played.