Many websites, including the one linked in the title, advocate the use of credit cards to rack up rewards as a way of saving money (see number 1 in the link). I would like to propose that this claim is false. Credit cards do not help you gain monetarily, in fact the opposite occurs. This occurs for two reasons: 1)the psychological effects of spending on credit 2)the credit card industry itself. Part 1 will begin the discussion about the psychological effects that occur when consumers decide to use their credit card at the point of purchase.
Don't Be Fooled
I know it is easy to be enticed by the millions of rewards credit cards that exist. I mean, earning 4% cash back while purchasing groceries does sound exhilarating. Little did you know that when you are handing over that piece of plastic, your mind is working in mysterious ways.
The Psychology of Spending
Various studies, such as the "The Realities of Spending" by Greg Davies and "Effects of Payment Mechanism on Spending Behavior: The Role of Rehearsal and Immediacy of Payments" by Dilip Soman have proven the psychological effects that occur when we whip out the credit card. When using a CC our mind tends to group transactions. For example, adding a $40 charge to a $345 credit card bill makes the $40 seem smaller, which increases spending. CC spending also results in dissociation of payments from consumption, as the payment occurs much later than at the point of sale (thre is a month-long payment cycle). Thinking about the cost of a purchase while consuming it can lower the pleasure gained from the purchase, so with credit cards you don't feel the "pain of paying" and there is a weaker averisve impact. This increases the likelihood of making additional purchases as you aren't "hurt" by the purchase. Lastly, when using a credit card our mind decouples the payment from the actual transaction. You buy now and pay later so the act of purchasing and paying become distinct from one another in your mind. Credit cards cause this because there is a period of time between when you purchase the item and when you pay the bill. Also there is a high amount of diversity in the types of of transctions on a credit card, so this reduces coupling. If you buy clothes, gas, food and other things on your card, it will result in a reduction of coupling for all purchases.
All of these pscyhological effects result in increased spending. Not convinced? I bet you will be after my next post.