The business model of rewarding consumers for their credit card purchases is something most banks have adapted over the past two decades. In the U.S. the vast majority of cards on the market incentivize spending by giving the cardholder cash back, points, or airline miles for each dollar spent. While this may appear to benefit the consumer, in reality this practice may actually be hurting them.
Studies have demonstrated that consumers spend greater amounts when there is a sale, discount, or coupon involved. Credit card companies use this psychological principle to their advantage by offering higher rewards on specific categories of spending. In turn, these rewards encourage some people to buy more than they normally would. This cycle contributes to higher debt and lower savings rates.
Furthermore, the rules of the credit card reward programs are often far too confusing for the average consumer to decipher. Most programs have caps on the amount of cash back that can be earned in a given month or quarter. Many issuers further complicate matters by offering different tiers of rewards depending on the amount spent during a calendar year. Those that market credit cards only add to the problem. MSN.com’s credit cards listing fails to inform the consumer about any of the fine print. CreditCardForum.com’s dubious ranking of their best cash back credit cards in reality is nothing more than a collection of ads. There are a few reputable resources such as Kiplinger.com’s best cards for the way you spend article, but honest reviews like that are far and few between.
Last but not least, it is important to take into account the negative impact credit card processing fees have on businesses. A merchant typically pays anywhere from 1.5% to 3% of the total purchase price to the credit card companies. The business must raise prices in order to absorb these added costs. The end result is higher prices for consumers across the board. While the rewards cardholder may be earning a 1% rebate, it is obviously not enough to balance out the processing fees which run much higher. ?
