Are Credit Card Rewards Causing You To Overspend?

Today’s post is from Mike, the founder of, which is a website for credit card reviews and discussion. You can find him blogging daily on the site. I love this post because it presents an awesome counter-point to my typical position that credit cards are extremely beneficial and can be used responsibly, even for emergencies.

For years it was not possible to use a credit card at McDonald’s. This comes as no surprise, being that small purchases are the most expensive to process (15 to 30 cents up front, plus the 2-3% on the total price = a high percentage going towards fees when buying a burger and fries!).

But early last decade McD’s decided to try out credit cards and much to their surprise, they found that the average transaction size rose from $4.50 to $7.00!

Did the purchase size increase because customers were buying meals for their friends, too? That’s unlikely.

Rather, one can presume that with plastic in hand, a customer is more inclined to skip the dollar McDouble and instead splurge for the Angus Deluxe. And while they’re at it, why get a $1 cup of Joe when the premium iced mocha looks so delectable?

Who’s to blame?

Without a doubt, that type of mentality is probably what contributes to the average McD’s credit card transaction costing 55% more. McDonald’s isn’t dumb – they know this and that’s why they rolled out card acceptance ASAP as soon as they realized what was happening.

Most other fast food chains quickly followed. Then, even the banks tried to capitalize by offering higher rewards on fast food, like the Citi Forward credit card does.

But should we be blaming McDonald’s and the banks… or ourselves for this frivolous up-selling? To be honest, I’m sure all parties play a part. But ultimately, we can’t control the restaurants and the credit card companies. However, we can control ourselves.

All of us (myself included!) have probably been guilty at one time or another of spending a bit more on food than we need to, simply because we had a credit card in hand. This is why it’s so important for us to be conscious of this and mentally force ourselves to resist the temptation.

But that’s just food, how about everything else?

Well according to a study by Dunn & Bradstreet (the #1 credit reporting bureau for businesses), when people pay using credit cards, they spend 12-18% more. Wow, that’s a pretty significant increase!

So how much of that increase is due to frivolous overspending? And how much of it is due to the fact that the typical credit card user has above-average income, and therefore, buys more in general? Well, that we don’t know.

But as someone that writes credit card reviews for a living and runs a forum dedicated to them, I do know that without a doubt, at least a portion of the credit card users that average 12-18% higher are indeed overspending!

Do rewards perpetuate the problem further?

If plastic in and of itself causes some people to spend more, than what happens when we throw rewards into the equation?

Let’s face it–as Americans we love “free” stuff and the whole allure of points, miles and cash back credit cards seem like a good way to score something for nothing. But ask yourself this “Would I be spending the exact same amount if I were paying with cash?”

For some people, the answer is yes, and for them credit card usage is not a problem. However, for the people that think the best cash back credit cards giving 5% are an excuse to spend an extra 12% to 18% at the grocery store, they’re doing themselves a disservice and in fact – instead of saving money – they are actually wasting it! (they would be better off focusing on doubling up grocery coupons and doing an analysis of their grocery store receipts to learn how to save more!)

What can you do to protect yourself?

All of us have different strengths and weaknesses in life. If your weakness is buying things, then you should think long and hard about credit card usage. Are they causing you to spend more at McDonald’s? Is the 5% cash back at a department store causing you to buy clothes you don’t even need?

And even if your weakness isn’t so obvious, is there a possibility that you’re doing it subconsciously? These are questions all of us need to be asking ourselves, no matter how financially disciplined we think we may be.

The bottom line is that credit cards can be good financial tools, but only when they are used with the utmost self-control. If they cause you to spend more than you normally would (even if it’s just a little bit), you would probably be better off forgoing them completely and instead, sticking with debit cards or charge cards, where the balance is due in full each month.

21 thoughts on “Are Credit Card Rewards Causing You To Overspend?

  1. I think the rewards are worth using a credit card – even if I spend a little more.

    I have gotten 6 business class trips to asia over the years on credit cards, 10+ domestic trips, numerous hotel nights, and over a $1,000 worth of gifts cards.

    I always get a bonus – use the card for a year – and then cancel the card. Then repeat again. Done this about 5 times with a Unit credit card, 3 times with marriot, 2 times with priority club, 3 times with American Airlines and 4 times with Citibank Rewards program.

    1. Any adverse effects from all this opening-cancelling on your credit score? Just curious.

      1. I would say it hurts it marginally – my score is about 770 and ranges from 760-780.

      2. Actually, that is not as bad as I would have thought. I assume you keep around 1 or 2 cards that have been open for a long time? Age is an important factor and opening and closing 1 card every year or so shouldn’t do to much damage.

      3. Age – I get a D on that when I look at Credit Karma – about 2 years is my average.

        I have only one card that has been open a long time. I had a GM card that was open for 10 years and I closed it – then I learned about the length of credit – and wished I had not closed that card!

        However, I always pay my bills on time and have a very low outstanding balance percentage – 2 of the more important items. Thus my credit score is pretty high.

  2. *jumping on soap box*
    Please produce the Dunn & Bradstreet study rather than linking to Dave Ramsey who doesn’t have a copy either. It’s telling that no one out here on the internet can find this study. Financial bloggers just keep citing the same statistic without adequate documentation to back it up. There’s also a recent Fed Bank study from last year which purports a similar story, but once you read the study and analyze the data, the flaws are obvious and numerous.
    *jumping off soap box*

    For those of us that spend less than we make, seek to maximize rewards programs, and pay our bills in full every single month, credit cards are a boon. For everyone else, they are a definite risk to one’s financial well-being. Figure out who you are and live accordingly.

    1. For what it’s worth, I have the same concerns, but my understanding is that the study is not public information, but only accessible via a fee. I trust Dave Ramsey enough to believe that he’s being upfront with us (my trust might be misplaced, but it’s there). Studies are inherently biased and flawed in many ways, so in essence I take them with a grain of salt and go more by what I observe first-hand, which would support the 12-18% hypothesis. That’s my 2 cents, anyway.

      1. I do research for a living. Make sure you have a mighty big grain of salt.

        I do not trust Dave Ramsey.

      2. Right on. Dave talks out of the side of his mouth most of the time. He also talks about FICO scores and shares false information with his followers. Probaly because he is still soar for ruining his own credit. I would only believe 10% of what comes out of his mouth. He also talks about mutual funds, but has yet revealed which ones he has that returns him 12% that he always boasts about. Hes just making his millions off of people who don’t have common sense with paying down their debt.

    2. Actually, I think the number is way off… I’m pretty sure it’s more than 18% overspending for average credit card user.

      When my family stoped using credit cards last year, we got 25% decrease in monthly spendings. I use to analyze everything, so it’s not a gut feeling, it’s hard numbers for my family.

      Yes, we were paying balance every month, and didn’t do anything stupid. And I consider myself very financially responsible, who just uses credit cards to “maximize rewards”… Just a few more impulse purchases every month here and there ,nothing big, we thought…

      As for “maximize rewards programs”… I was living and breathing by amex point for 10 years. Now we spend every month about the same amount that I would collect with points in 12… So all this rewards programs (even no limit 5% cash back, which is probably non existent) is suddenly seem a bad joke 🙂

      1. I think a lot of people feel the same way–I’m eager to hear from other people who have data to support their decreased spending based on cash/debit use.

      2. oops! I meant to say:
        Now we SAVE every month about the same amount that I would collect with points in 12… So all this rewards programs (even no limit 5% cash back, which is probably non existent) is suddenly seem a bad joke 🙂

        You won’t find much hard statistical data. People who don’t use credit cards are rare animals this days. But I, personally, enjoy being different. It’s ok – I kinda literally laugh all the way to the bank.

      3. On the contrary, I think a lot of people went your route in the recent recession. I think for many of them, it made a big difference like you outline.

  3. Try testing yourself to see if you spend more with a credit card than you do if you paid cash-only:

    Spend 1 week buying everything with a credit card.
    Spend the next week buying everything with cash. Track it.
    Repeat 6 times (over the course of 12 weeks).

    This should give you a good, varied sample size. Then you can compare between the amounts you spend and see under which conditions you spend more.

    Note: Do not include trips or vacations during these 12 weeks … the results are best if your environment stays consistent.

    1. I like this alternating approach. I have a feeling though that I would be subconsciously driven to lower my expenses when using credit simply because I knew I was experimenting with myself. 🙂

  4. My 2 cents:

    1) Opening/Closing credit cards isn’t the most damaging aspect. The real measurement is average age of an open account. So, opening and closing credit cards is a problem if you close old ones and open new ones, thereby decreasing average. Plus, it creates “inquiries” which count against you.

    2) Scientist had measured responses in human brains during purchases and found that area of your brain mostly active during the cash transaction is substantially less active while using plastic. That part is almost non-activated when you are using speedcheckouts such as mastercard speedpass or amazon’s one-click purchasing. There is discussion about NFC speedpays using cell phones, such as google and an upcoming iphone. Brain responce for those transactions would likely be simular speedpass…That’s where it would really become a problem….

    1. Fascinating! So there’s actually a physical response to using debit (and maybe cash?)! Do you have any more information on this or can point me in the right direction for some research?

    2. Since you guys like backup for information, here are couple of links on my point 2 above:
      MIT experiment showing that willingness-to-pay (read: ability to charge more) can be increased when customers are instructed to use a credit card rather than cash. The effect may be large (up to 100%) and it appears unlikely that it arises due solely to liquidity constraints.
      For those of you who like boring science prose

      This is part of standard curriculum in MBA level marketing programs.

    3. Like I said on Credit Karma – I got a D for length of credit.

      However, I believe people think this factors in more than it really does. As I said my credit score flucuates between 760 and 780 very good but not great scores. However, good enough for me as credit card companies continue to give me new credit cards with very nice sign up bonuses.

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