How Credit Card Rewards Trick You Into Overspending

Kelly Fedynich of Morristown, New Jersey, loves to travel.

The teacher, 28, had used a rewards credit card before. She had even accumulated enough points to visit Iceland and fly to Florida for a wedding.

Then in February 2018, she signed up for the Chase Sapphire Preferred credit card after seeing it recommended repeatedly by travel deal blogs. She switched to Chase hoping to get better flight rewards.

Signing up for the card, which had a $12,000 limit, came with a boost: If Fedynich spent $3,000 in the first three months of using the card, she would get a bonus of 50,000 points.

She spent $3,000 and got the bonus, but it’s still costing her.

“I was deliberately overspending,” she said. She would talk herself into buying, justifying purchases based on their values in points.

“I wasn’t following any of my budget plans, just [so I could] meet that money requirement,” she said.

When her teaching income stopped over the summer, she took money out of savings to pay her credit card bill.

“It was the first time I wasn’t able to pay my credit card statement in full,” she said.

The High Costs of Credit Rewards

Fedynich is just one consumer enticed by the promise of rewards for shopping with a credit card, only to find themselves overspending — and in debt.

Among the highly visible bloggers who play the system to travel for free or close to it are plenty of everyday success stories. It’s true there are free flights, hotel upgrades and more to be gained. But it takes strategy and planning to make credit card reward programs work. (If you’re thinking of getting a rewards credit card, here are five questions to ask yourself first.)

Rewards cards have skyrocketed in popularity in just a few years. A study by research firm Mercator Advisory Group cited by the Wall Street Journal (subscription required) estimates that 92% of all U.S. credit card purchase volume is made on rewards credit cards, up from 67% in 2008.

A 2018 NerdWallet survey of 2,000 adults found that more than two-thirds of respondents said they had a credit card that earned travel rewards. One-third of cardholders surveyed said they often overspend to earn rewards.

Rewards credit cards offer various benefits for spending money on your card. Cash-back credit cards, for example, reward customers by giving them credit toward their statement.

One point is typically worth 1 or 2 cents, though some cards offer more when you spend on travel, dining or another purchase category. Some cards reward purchases at particular stores, while others reward all spending with points or miles.

Then, you can redeem your accumulated points toward travel tickets, hotel stays, gift cards or other purchases.  

The 50,000 Chase Sapphire Preferred bonus points Fedynich earned are worth $625 toward travel, or 1.25 cents each.

 

What’s that worth in cash? That’s harder to determine. It requires clicking through to the sign-up offer details and scrolling to the final paragraph. There, you’ll find that those 50,000 points are worth $500 in real money.

Interest rates for the card range from 18% to 25%, depending on an applicant’s credit history.

Those who aren’t successful not only miss out on the perks — they can also end up in debt.

Once you have a balance on a rewards credit card, which typically have higher interest rates, “it gets ugly fast with compound interest. It can wipe out your rewards,” said Beverly Harzog, who writes about credit cards at U.S. News and World Report.

How Rewards Set You Up to Overspend

Shannon McNulty of Boulder, Colo., maxed out her Capital One Venture credit card after trying to earn miles for a return flight from Europe. Daniel Brenner for The Penny Hoarder

Shannon McNulty was 20 when she applied for the Capital One Venture credit card in 2015. She was preparing to go to England for a college study abroad program, and she had heard that using a credit card overseas was safer than using a debit card.

The card boasted no interest fees for the first year, and would allow her to earn miles toward future flights. It wasn’t her first credit card, but its $5,000 limit was much higher than the limit on the starter card she already had.

She hoped the card would help her earn miles toward her flight back to the U.S. from England, or to go toward travel between her home state of Vermont and her college in Indiana.

In the months before her trip, she started using the credit card so she could start earning miles.

“Looking back, I did swipe more when I first got it, before traveling, for the points,” she admitted.

“I went over [to England] with the card, and with a big chunk [of money on] my debit card to transfer in to pay it off,” she said. But she soon realized, “I have this extra money. I should use it.”

During her four-month stay in England, she racked up a $3,000 balance on her Venture card. The bulk of her spending on the card wasn’t for food or drink, she said, or daily necessities.

It was on souvenirs to bring back for friends and family.

Three years later, at age 24, she regrets it. “No one really cares what you bring back for them.”

Studies show that rewards credit card users like McNulty are more likely to accrue debt than reap the benefits.

“There are benefits for those who pay on time, subsidized by delinquencies and a lot of interest,” said Deborah Goldstein, executive vice president of the Center for Responsible Lending.

A working paper from the Federal Reserve of Chicago analyzed spending and debt for consumers who had recently obtained a credit card with a rewards program.

According to the report, average spending on a credit card in the first nine months after a cash-back program started increased by $76 per month. Over the same period, users’ debt rose an average of $197.

Overall, each cardholder received an average of just $25 in cash-back rewards. The data is from 2002. A representative from the Federal Reserve of Chicago said an updated study had not been performed.


After McNulty’s one-year introductory period, her interest rate shot from zero to 21%. When she maxed out the card after returning from England, her minimum monthly payment on the card was about $140.

“Sometimes, right after I was out of school, I paid my electric and rent and I had no money left,” McNulty said. The small payments she could make didn’t do much to reduce her balance.

Her interest accrued so quickly that she felt her efforts to make substantial payments on her card were futile.

When McNulty spoke with The Penny Hoarder by phone, she pulled up her latest credit card statement online.

“If I pay the minimum payment, I’ll pay off my balance in 19 years, and I’ll end up paying $13,076,” after interest, she said.

Rewards Programs Face Few Regulations

Shannon McNulty’s European souvenirs are shown with her Capital One Venture credit card. Daniel Brenner for The Penny Hoarder

McNulty has the benefit of seeing the big picture on her monthly statement, and the impact of her spending on her efforts to pay the debt back. But as recently as 10 years ago, credit card users didn’t have that resource.

When it came to the long-term consequences of their spending, they were largely in the dark.

Prior to the Great Recession, credit card issuers could raise interest rates on a whim, retroactively tacking the additional interest onto existing balances. As a consumer, you could exceed your credit limit, avoiding the embarrassment of getting declined at the cash register, for an additional fee.

But part of the government’s recession-era crackdown on predatory lending included credit card reform.

Enacted in 2009 with bipartisan support, the Credit Card Accountability, Responsibility and Disclosure (CARD) Act required that credit card issuers issue transparent billing statements and limited changes to interest rates.

It required each bill to have a box that explains how long it will take for a consumer to pay their credit card balance. It reiterates the minimum payment due and shows the user how much they’ll pay on their balance, including interest, if they only pay minimum balances.

Before the recession, credit card issuers would often set up on college campuses, giving out swag to encourage card applications. The CARD Act banned such gifts, along with preapproved offers mailed to people under 21. It also required that young borrowers have a co-signer or prove they could afford the credit card.

One area notably absent from CARD Act mandates is rewards programs.

Credit card issuers can still change their promotional offers, cardholder benefits, point-tallying formulas or reward expiration dates at any time. It’s up to the consumer to pay attention to their card’s policies.

Meanwhile, as the recession faded into memory, credit card use increased. And the rewards increased, too.

That’s because rewards programs offer perks like larger sign-up bonuses when the economy is doing well, said Harzog, the credit cards writer at U.S. News and World Report.

“Issuers will compete with each other for the best customers who use their cards a lot,” she said. “They want those people, so they try to outdo each other.”

Since the Consumer Financial Protection Bureau began tallying complaints in 2011, it’s gotten more than 3,000 about credit card rewards programs. Most of the big players received the most complaints — American Express, Citibank, JPMorgan Chase, Bank of America and Barclays, in that order.

Of the complaints, only about 900 include a written description of what happened. Of those:

  • More than 150 cited a problem earning or redeeming airline miles.
  • About 80 cited a cash-back program.
  • 25 were related to hotel rewards.

The CFPB stopped collecting and reporting statistics specific to credit card rewards in spring 2017. Instead, it lumps them into the general credit cards category.

To determine the number of credit card reward-related complaints beyond that date, The Penny Hoarder searched the main database of credit card complaints for 21 terms relating to reward programs, such as “cash back,” “airmiles” and “bonus. We found that the ratio of rewards complaints among overall credit card complaints has tripled since 2015.

 

The CFPB announced in 2013 that it would review rewards program disclosures, with then-director Richard Cordray stating that the bureau would consider whether stronger consumer protections were needed for such programs.

But while subsequent reports from the CFPB in 2015 and 2017 repeated the same concerns about transparency and the ease of understanding rewards program disclosures, further restrictions haven’t been established.

For its 2015 report on the credit card market, the CFPB reviewed more than 4,000 pieces of reward credit card marketing material.

Sign-up bonuses were the largest source of complaints to the bureau that year.

“When offers we examined involved a sign-up bonus, only about one-third of marketing materials we examined included terms and conditions for the broader rewards programs,” the report explained.

The CFPB’s 2017 report on the same topic noted the popularity of reward credit cards across all credit score tiers but did not revisit most of its previous concerns about transparency and clarity of program terms and conditions.

“It might be hard to tell from some credit card advertising what the full terms of reward programs [are],” Goldstein said. “The CARD Act does a good job of preventing the worst abuses,” by credit card issuers, “but there could be more done to rein in deception.”  

The CFPB has only taken three CARD Act enforcement actions in the past seven years, as it’s focused on mortgage and installment lending. The credit card industry has largely monitored itself.

The Tricky Psychology of Credit Card Rewards

Dan Seitz, 36, of Somerville, Mass., is working to pay off his Amazon Rewards Visa card. Katherine Taylor for The Penny Hoarder

Dan Seitz of Somerville, Massachusetts, applied for an Amazon rewards credit card in 2014. He was buying a small kitchen appliance he planned to use a lot. The discount would reduce his order to just $50.

Soon, Seitz was footing the bill for group dinners out and spending freely for the promise of cash back.

“There’s plenty of room on the card,” he said he would tell himself.

“But it kept adding up,” he said. “I didn’t realize how deep of a hole I was in.”

It was only after he ended up $12,000 in debt that he fully understood the card’s rewards program. He was getting 1% Amazon credit back on all his purchases — basically a penny per dollar spent. It was a nice perk for someone who shopped on Amazon a lot. But the card had a 17.5% interest rate.

Seitz, 36, wasn’t unfamiliar with debt; in fact, he had worked hard to pay previous debts. “I’ve been able to double my student loan payments. I got [through] those,” he said, acknowledging the budget he and his wife have maintained over the years. “I managed to pay off a lot of other credit card debt I’ve had in the past.”

Those accomplishments had made him confident. “I didn’t have any debt,” he said. “I let myself relax too much.”

The abstract nature of paying with a credit card makes it easy to overspend, said Manoj Thomas, Ph.D., who studies the psychology of consumer habits at Cornell University.

Paying for goods and services is most “painful” when you pay with cash, because you can see and feel the bills leaving your wallet, Thomas explained. There’s a bit less pain when you use a debit card and the abstract, digital money leaves your checking account immediately.

But credit? Paying with a credit card is just about painless. Not only do zero dollars leave your account at the time you acquire an item or service, but you also have the option of putting off that payment for weeks, months, years, forever.

Using a credit card lowers the payment pain you feel, then credit card rewards help you justify using those cards, Thomas explained. “If you’re trying to buy a handbag, and the handbag costs $300 or 500 points… spending 500 points feels less painful than $300,” he said. “Points don’t feel like real money.”

But consumers know they have to spend to earn. And they feel entitled to what they earn.

“We love collecting points and achieving levels,” said Scott Rick, Ph.D., a marketing professor at the University of Michigan. “Point- and mile-based programs are a way to do that. They’re more fun than something that gives you a tiny percentage back in terms of straight cash.”

But the gamification of credit card use is dangerous, Rick said. “A lot of the decisions to acquire credit are driven by the games and not the cost.”

Even if consumers are aware of interest rates, they may not fully understand how interest will compound over time. They pay less attention to the pain of payment and the burden of a revolving balance.

“If you add incentives on top of that, it’s like putting gas on the fire,” Rick said.

What Winning the Rewards Game Looks Like

Dan Miller and his wife have 40 credit cards between them. His blog, Points With a Crew, delves into the logistics of obtaining nearly free travel for his family of eight, with how-tos for newcomers to try to replicate.

But he knows that his level of success isn’t realistic for most of his readers.

“It’s something I enjoy doing,” he said. “I enjoy maximizing rewards, looking into different programs. It fits in well with things I already enjoy and am good at. I wouldn’t recommend it for most people.”

Rewards experts like Miller emphasize the importance of sign-up bonuses for new credit cards, which can range up to 50,000 miles or points.

But reaping that benefit requires two qualifications from applicants: solid credit, and the ability to spend the required amount in the bonus offer’s time frame. Spending $4,000 in three months is a common requirement to get a sign-up bonus for higher-end cards like Chase Sapphire Preferred and Reserve.

It takes some strategy to make that spending happen once, let alone several times a year, if you open new cards to get sign-up bonuses — also referred to as churning.

Some people wait for big planned purchases to put on their new card, like a car insurance payment or vacation package. Some people manufacture spending through gift card purchases and resales, Miller said. Others pull out their card at every turn, plunking it down for group dinners or dates or anything else that will help rack up the balance.

“The value of miles and points is for people that are out of debt and that have the ability to stay out of debt,” Miller said. The stories and testimonials on blogs are aspirational, but they’re far from a guaranteed scenario.

Online communities of credit card maximizers are filled with tales of failure. For every blogger with an organized binder of credit cards, there’s a novice who didn’t read the fine print or understand the restrictions for their rewards credit card.

McNulty, the 24-year-old who used her rewards card while studying abroad, said she struggled to redeem the rewards she felt like she had earned. When she checked flights through the credit card points portal, she usually found better prices on other sites. She paid for just one flight with miles in the first year she had the card.

“I didn’t realize that the miles don’t translate to actual miles or to actual dollars,” she said. “It didn’t translate into any kind of plane ticket.”

Why the Future of Credit Rewards Is Uncertain

Now, the question is whether those rewards will stick around for those who want to take advantage of them.  

Access to credit and rewards “comes and goes with the economy,” Harzog said, noting that Capital One and Discover have cut back on credit limits in the past few months. Both target less-affluent customers, she said. “When the economy looks like it’s about to peak, credit card issuers pull back.”

Just as consumers who pay 20% or more in interest each month subsidize credit card benefits for users who pay their entire balance each month, the very stores where consumers spend their credit play a part.

Retailers are typically required to “honor all cards” if they choose to accept Visa or Mastercard at the register. But credit cards with generous rewards programs also tend to have higher interchange fees for merchants.

But card issuers are taking flack from retailers that don’t want to subsidize rewards programs through higher interchange fees.

Some major chains like Target are lobbying for an end to the “honor all cards” rule. If retailer pressure on card issuers increases, consumers could see a reduction of their card benefits.

And with no consumer protections that apply directly to reward programs, issuers are in near total control of how any program changes are implemented.

‘It’s Easy to Get in. It’s Hard to Get Out’

Shannon McNulty paid for just one flight with miles in the first year she had her rewards credit card. Daniel Brenner for The Penny Hoarder

McNulty said she’s struggling to rebuild her credit score after some late payments on her credit cards. “[I’m] cleaning up the mess I made with them.”

She doesn’t want another credit card.

Seitz is still paying down his debt, even though he stopped using his Amazon card. He pays aggressively, making a payment of about $1,000 on the card each month, thanks to the freelance work he does alongside his full-time job as a content marketing writer.

“It’s easy to get in [credit card debt],” he said. “It’s hard to get out.”

In New Jersey, Fedynich has gone back to using cash, for the most part, while she works on paying off her card. “I’m dying to go on another trip and use those mileage points,” she said, but she knows her point balance wouldn’t cover her rooms or meals once she gets there. “I’m trying to pay it off first before go anywhere,” she said.

But once she pays off the card, she thinks she’ll be done with trying to earn rewards. “As cool as it is, I need a budget I can see every day,” she said.

Every time she makes a payment for less than the full balance, she gets frustrated.

“It’s the ball that keeps rolling away,” she said.

Lisa Rowan is a senior writer at The Penny Hoarder. She previously co-wrote “The American Nightmare,” a four-part series on the impact of the subprime mortgage crisis 10 years later.

Data journalist Alex Mahadevan contributed to this article.

Considering signing up for a rewards credit card? Check out these five elements to consider first.

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