Think You Must Put Every Purchase on a Credit Card? Think Again.

There is a pretty dedicated online community of people who are obsessed with optimizing credit card rewards.

While I am not against collecting credit card reward points, and in fact do so myself to a reasonable degree, A lot of people take it a bit too far and try to make literally every purchase possible with their credit card.

It is easy to see why this logic is treated as appealing.

The financial system is heavily incentivized to reward loyalty, and getting a free flight to Europe just for buying your normal household essentials feels like a massive, undeniable win.

But you should keep in mind the psychology of how you spend your money,

When you gamify your daily spending to chase points, you ignore the invisible behavioral tax of swiping plastic.

And when we look at the peer-reviewed research, optimizing for “free money” often tricks you into spending significantly more than the rewards are actually worth.

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The Problem with the Points Game

To the travel hackers of the internet, paying with a debit card or cash is a massive unforced error. Why use your own money when you could be earning points on the bank’s dime?

Because people do not evaluate transactions in a vacuum.

When you hand over physical cash or swipe a debit card where the money immediately vanishes from your checking account, you feel what behavioral economists call the “pain of paying.” Your brain registers a loss. This creates healthy friction because it’s pretty healthy to feel a tiny bit of discomfort when spending your hard-earned money.

But when you swipe a credit card, that pain is deferred.

The bill isn’t due for 30 days. And because the transaction is instantly rewarded with a dopamine hit of “points,” the entire psychological dynamic of the purchase flips.

You stop asking, “Do I really need this?” and subconsciously start asking, “How many points will this get me?”

What the Academic Research Says

To debunk the idea that credit card rewards are purely “free money,” we can look at a brilliant, peer-reviewed experiment conducted by Drazen Prelec and Duncan Simester, business professors at the Massachusetts Institute of Technology (MIT).

Their study, perfectly titled Always Leave Home Without It, tested exactly how different payment methods alter a consumer’s willingness to part with their money.

The researchers set up a real-world, sealed-bid auction for highly desirable tickets to a Boston Celtics game. (As a lifelong Raptors fan, I don’t personally see the appeal of this prize, but to each their own ;)

Half of the participants were told they had to pay for the tickets with cash. The other half were told they had to pay with a credit card.

Their findings completely dismantle the illusion of the savvy, purely logical credit card optimizer:

The Credit Card Premium

The participants who were told they could pay with a credit card submitted bids that were significantly higher than the cash group. In fact, the average credit card bid was nearly twice as high as the average cash bid.

The Anesthetic Effect

Because swiping a card removes the immediate, visceral pain of handing over physical money, the credit card participants were completely unanchored from the actual value of the item. The abstract nature of the payment allowed them to justify a much higher price tag.

The Rewards Trap

If you are spending up to 100% more on a purchase simply because the payment method feels “painless,” that 2% cash-back reward is utterly irrelevant. You aren’t beating the system; the system is beating you.

The Lukewarm Middle Ground

The extreme take demands that you route every single dollar of your life through a massive credit card company to scrape back a few pennies, completely ignoring the psychological manipulation built into the tool itself.

I’m also not saying you should go home and cut up all your credit cards.

You might try a little experiment yourself. Track your spending for a month when you bring your credit card with you everywhere and make as many purchases with it as possible.

Then, leave your card at home for a month and make as many purchases with your debit card.

If you spent more than 2% (a typical cashback reward on a premium credit card) in month 1, then month 2, then you might not be gaming the system; it is likely gaming you.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.