The cashback program that costs you more

A reader asked me if his credit card cashback was “worth it”. 2% on everything. $200 annual fee.

He was spending $18,000 a year on the card. So his cashback was $360 a year. Minus $200 fee, net $160.

Sounds fine. Until you ask: what would he have spent if he’d used a debit card?

Research from the Journal of Consumer Research found that credit card users spend 12 to 18% more than debit card users for identical categories of purchases. Because swiping feels different from watching money leave your account.

On $18,000 of spending, that’s $2,160 to $3,240 more than he’d have spent with a debit card.

His $160 cashback “reward” cost him somewhere between $2,000 and $3,000 in extra spending. The cashback is designed to make you feel rewarded while encouraging behaviours that make the card issuer money.

This has a name. It’s called framing. The reward is framed as earnings on existing spending. But the reward’s real job is to increase future spending.

Rule
Cashback is only profitable to you if it doesn’t change your spending behaviour. If you’re spending more because “I get 2% back”, you’re paying 10 to 15x the reward in extra spend.

Action for this week
Track your credit card spending for one month. Then ask yourself: would I have bought this with cash? The honest answer is your real cashback calculation.

Next week
The $3,000 coffee machine nobody needed.

Know someone proud of their “cashback strategy”? Forward this.

P.S. The only people who genuinely profit from cashback cards are those who spend exactly the same whether they have the card or not. That’s about 5% of cardholders.