In a society where the average American spends 40% of their money on luxury items, the need to reduce waste has never been greater.
For regular consumers, credit card rewards can become a practical way to increase savings.
The benefits is reducing your purchasing by 1% can have an enormous impact.
When you look closer however, credit card rewards strategy greatly affects spending.
Often times, the best credit cards rewards strategy is not to have one.
This article we try to explain why.
Cards Rewards And The Cost-Value Fallacy
Credit card reward schemes are a false economy.
A false economy occurs when a consumer makes purchase that seems to save money in the beginning, over time it results in more money being wasted.
The most famous example of a false economy in consumer culture is Amazon Prime.
Amazon Prime asks consumers to pay $79 per year in order to earn free shipping on items along with other ‘perks’.
Statistically, the consumers is more likely to use Amazon Prime more often in order to avail of free shipping.
When it was first introduced, Amazon Prime members increased their purchases on the site by roughly 150%.
The pursuit of credit card rewards programmes is very similar.
Consumers are buying a product which validates greater spending and probably relieves them of any guilt when buying unnecessary purchases.
The perceived value of the credit is probably outweighed by the guilt-free purchases – unless you are willing to monitor your spending closely.
In a study carried out by Agarwal, Chakravorti and Lunn, consumers spent an average of $68 more per month when using credit card reward schemes and took out an average of $115 per month after cash-back reward programmes.
A similar study carried out by Gross and Souleles in 2002, found that consumers significantly increased spending when using credit card rewards schemes (download).
A More Practical Alternative
A more practical alternative to a credit card would be to lower debit card fees.
Today, there are many banks which offer consumers free banking services in exchange for their data.
This is an easy compromise to make as the data will most likely be used to provide services which are specifically tailored to you.
The third party distribution of data is a an emerging topic.
As we learn more about data capitalism however, I would imagine that the distribution of third party data will closely regulated.
If you are in the US, we would recommend Simple.
If you are in Europe, try Number 26.
Credit card companies use reward schemes to lure customers in.
Unless you are monitoring your budget very closely, you may find their total cost outstrips their value.
Finding an online bank with low transaction fees is without a doubt a better option.
There will be no hidden incentive to spend extra and there is no hidden charges that you can be tricked into paying.
You can apply this low-cost fees approach to many things, including investing.