Are You Getting All the Credit Card Rewards You've Earned?

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Littered throughout the personal finance blogosphere are tips, tricks, and success stories on using rewards credit cards. If you play the rewards card game right, you can earn some cool cash back, free flights, or money for college. Provided you are paying off your balance each month and avoiding any fees or interest charges, a credit card rewards program is a fun game that the money nerds will always win. (See also: Money-Saving Credit Card Tricks)

Unfortunately, it's not as simple as that.

Not only do nearly one-third of credit card rewards go unclaimed every year — to the tune of $16 billion just left on the table — but the psychology and terms of credit card rewards mean that even the responsible card users who game the system end up spending more than they intend. After all, the banks wouldn't offer rewards cards if they didn't make money from them.

Here are the facts about rewards cards that never seem to make it into the cheery commercials starring celebrities.

You Spend More When You Pay With Credit

The mere fact that you plan to pay with a credit card is enough to make you spend more money. Whipping out your credit card simply does not hurt as much as counting out cash, meaning you are more likely to overindulge.

In addition, researchers have found that the prospect of earning rewards with a credit card will cause your spending to go up — and the increase is more pronounced in cardholders who would not otherwise use credit. This means that even responsible credit card holders are enticed into more spending (and debt!) because of the motivation of rewards.

As if that is not distressing enough, a study from 1986 (which has recently been tested and proven again) has shown that just seeing a credit card logo is enough to increase spending. In the original experiment, psychologist Richard Feinberg asked subjects to flip through images of items from mail order catalogs (with the prices removed) and write down how much they would be willing to pay for them. For half of the subjects, the table on which they were working was strewn with MasterCard paraphernalia, left lying there to suggest that the researcher simply had not cleaned up from a prior experiment. The other half of the subjects sat at an empty table. Those subjects sitting with a pile of MasterCard logos were willing to spend more on every single item, and they were willing to spend up to three times as much on some items.

Since that original experiment, further studies have shown that the logo effect works on "associative conditioning." That is, those individuals who have positive associations with credit cards will spend more with plastic, while those who have negative associations will not.

In particular, those individuals who game the rewards programs will have very positive associations with credit cards.

That means the banks are seeing increased spending (and debt) from the "responsible" cardholders, as well as those who struggle with credit. All for the low, low price of a few rewards. (See also: How to Win Cash Back Rewards Without Extra Spending)

The Lake Wobegon Effect

What is even more pernicious about the previous information is the fact that I would be willing to bet that nearly every Wise Bread reader with a rewards card is right now shaking his or her head and saying, "It doesn't affect me!"

That's because of a cognitive bias known as the Lake Wobegon Effect, named for the fictional town in Garrison Keillor's radio show, where "all the children are above average."

Basically, every individual truly believes that he or she is better than most people at everything from driving to managing money. In the book You Are Not So Smart, David McRaney writes, "No one, it seems, believes he or she is part of the population contributing to the statistics generating averages."

Banks are counting on that illusion of superiority, since it snags rewards card customers who would otherwise pay with cash.

You Can Only Opt Out of the Benefits, Not the Costs

You might be thinking right now that it would make more sense to simply get rid of your rewards credit card and carry cash. That will certainly ensure that you are not affected by credit's destructive pull on your better impulses. However, that does not entirely solve the problem of the costs of rewards cards.

That's because even though banks earn a great deal of money through their rewards cards programs, they still find ways to pay for those rewards without having to eat into their profit. They do this by charging fees to merchants for accepting their cards.

According to Ron Lieber of the New York Times,

Rewards-earning credit cards with the Visa and MasterCard logo often cost merchants more than plain-vanilla ones, which hints at the card companies' laser-like focus on subsidizing rewards for the affluent customers who are still spending, even if they are paying their bills off each month and thus paying no interest.

To protect their own bottom line, merchants build the credit card fees they pay into higher prices for their goods — which customers pay whether they use cash or credit.

In fact, the National Retail Federation estimates that the fees their members pay to accept just Visa and MasterCard cost an average of $427 per American household in 2008. 

Disappearing Rewards

Finally, there is the problem of unclaimed rewards. As I mentioned above, nearly one-third of the $48 billion worth of value in rewards go unclaimed and unredeemed.

According to that study, "[To] put [this] in perspective, the average household that is active in loyalty programs earns $622 a year, but does not redeem $205 of those rewards."

It's certainly understandable how this can happen. Unless you are inhumanly organized, it can be very easy to lose track of various rewards or forget to account for expiration dates and the like. (See also: Credit Card Reward Tips Most People Don't Follow)

The good news is that the average household is still raking in $417 worth of rewards ($622 - $205 = $417) each year. Sadly, you'll notice that's $10 less than the average cost per household because of merchant fees that I mentioned above.

So, even if you are successfully gaming the system, it's likely that you're still paying for it somehow.

Using Rewards Cards Rationally

The best way to avoid the psychological pitfalls of rewards credit cards is to use your card sparingly, pay off the balance every month, and schedule regular check-ins on your rewards, but otherwise ignore how your spending is tied to your rewards. These things will help you to sidestep spending traps and the possibility of forgetting about your rewards.

Do you use a rewards credit card? Do you redeem all of your rewards and perks?