Cashback rewards actually takes money out of your pocket. Here’s why.
It’s no secret that credit card companies make a massive amount of money from people racking up credit card debt through ridiculous their APR interest rates. These companies know well that a good chunk of people in America love immediate gratification only to profit from these people digging themselves into the hole of debt, one that they are likely never going to be able to completely pay back.
But if you are reading this, you’re probably a little bit more financially savvy than most Americans. You probably pay off your credit balance promptly most of the time. You actually kinda care about your credit score. You know that credit debt is something that will hurt a lot if you get careless with it. Good job, really, you are definitely on the upper percentile of Americans in terms of financial literacy.
However, credit card companies know this too. They know there are financially smart people out there who aren’t as easily tricked into just handing them money, but that doesn’t mean they aren’t going to try. In fact they do, and are very successful at it. Credit cards are a field loaded with many psychological traps that everyone who uses it are subjected to. As long as you have that card, no matter how good you are at balling (with your money), you are playing on their court.
It seems like cashback rewards is the biggest reason to have a credit card for people who are trying to save money. Cashback makes it seem like you ‘make money’ as compared to using direct cash or a debit card, and logical incentives points towards that this is a perfectly rational decision to make. I spend money on what I normally buy, and on the side, I just happen to make money. For someone who wants more or to save money. What’s not to love?
But that’s exactly what the credit card wants you to think. The fact that the credit card gives some sort of ‘guilt relief’ by the simple act of using the card is a very powerful psychological incentive that goes beyond simple rational decision making. Your spending becomes rationalized every time you use your credit card. Suddenly expensive purchases don’t seem as bad knowing that that at least ‘Hey, the more I spend, the higher my rewards I get back right?’ It seems harmless, but the presence of guilt relief is exactly the mechanism that encourages more spending, at the credit card’s profit, and at your expense.
It’s the same mechanism behind those trying to lose weight without sacrificing a lot (we all wish to get skinnier without having to put in the work). Many of my friends exercise very hard, running several miles a day, but they start to rationalize with themselves that they deserve a smoothie or juice, or a big meal. What happens is that they fail to actually lose weight despite the exercise they do, because a good thing (exercise) justifies bad behavior (excessive eating). This then causes people to just fail to achieve their goals because our temptation to rationalize compensation. Even worse, they end up even heavier sometimes.
Same exact same mechanism happening with cashback rewards, but the dumb part is that the rewards aren’t even that good. Like think about, 1% or 2% cash back? If I pay my months rent with a 1% cashback credit card of $500, I get $5 back. Alright, like I’ll take $5 for free any day, but this $5 isn’t free. Instead, I will pay you $5 to let me botch up your rational senses and let me run subtle psychology tricks on you that will impact your financial assets in my own interests. Suddenly the $5 is a small reward for something that is likely to carry a bigger cost to you. To some people it sounds like a test that challenges our discipline and will power, but truth is, most people will fail and end up getting more money taken out of their pockets otherwise. And that’s what the credit card companies are banking on.
You’d actually save more money getting rid of your credit card. The best way to guarantee avoid pitfalls is to never enter the arena they carefully curated. Monetary transactions can be simple if we choose to make it so. But instead, we play along their game that exploits our greed for more money. Similar to a con man who exploits a person’s confidence and greed to make risky decisions that were rigged in the first place, cashback rewards is just one of the more glaring ones that exploit the pleasure we feel from minuscule gains in return of being more lax with spending.
If you want to save money with manageable steps that is not within someone elses’ arena, and is instead in your complete psychological control, then don’t be tempted with petty incentives. Building a good base of habits and planning keeps you rational, away from companies trying to play your emotions against you.
Sure you can try to play their game and maybe make some money by keeping ahead of their fine print. But even I hesitate to bet on myself.
