I have a cashback rewards credit card. I get reward money which I can use in several ways: 1. Apply rewards to balance 2. Get mailed a check 3. “Redeem for purchase”- Similar to #1, but zeroes out a past purchase . 4. Purchase gift cards.
Option 1 can be used with any rewards amount above a single dollar.
There is not a reward store where you can purchase items. The way option 3 works is, you cash in enough points to reduce a past purchase to zero. You must have the exact amount, and can not take a partial redemption if you use option 3.
What is the advantage to negating a past purchase vs. just lowering your balance?
It doesn’t take money out of your pocket?
I’ve never seen that option before, but maybe it also cancels out any accumulated interest on that purchase.
I think it’s just based on psychology. Some people will think “I can buy this expensive thing and pay for it with my points. That makes the expensive thing free.” It’s no different than applying the same amount to your balance but it may feel different to some people. If these people spend more because of this feeling the credit card issuer wins.
To paraphrase Si Amiigo, you save some money.
I can tell you why I use my cashback card.
Basically I’m going to buy an item or service. The price is the same whether I use cash, credit or check. Using cash or check will cost me the full amount. Using my credit card gets me a 1-3% refund.
I use it because it saves me money. My card company offers the program to me because they collect transaction fees from the merchant in excess of the amount they refund to me. By offering the program they give me an incentive to use their card more and by doing so, they make money and I save money.
This of course, doesn’t factor in the societal cost of a merchant having to raise prices because his cash and check sales decrease while his credit sales (and transaction fees) increase.
You’re missing the point. He is asking why you would zero out an existing purchase rather than just taking a generic cashback or points.
Exactly. AFAICT, if you have $50 in points, there is no advantage to zeroing out a previous $50 purchase vs. applying the $50 in points to reduce your card balance in general.
Amazon CC points have a similar thing. I think the “free” purchase option is just a psychological marketing gimmick. In fact, it’s slightly better to pay down your CC balance instead of using the points for “free” purchases. That way you’re picking up additional points on the new purchases.
Really Not All That Bright probably has it right. If you’re carrying a balance, you start paying interest on new purchases from Day 1. By zeroing out a purchase, the principal balance on which interest is calculated is lowered. However, if you pay off the balance each month, there is no practical difference between the two.
- I would have assumed everyone got that, but maybe not. I thought the question was the difference between ways of claiming the rewards.
As Riemann pointed out it’s inferior to use the rewards as ‘points’ to buy stuff assuming the price in points equates to the price in $'s and you don’t get the 1%+ cash back on those points purchases. Whereas just getting a cash back check you would spend ‘new’ money on those same things and get the new 1%+ cash back. Unless they gave some price on the goods purchased with points lower than any merchant. That might be true if the ‘points’ are say airline miles. But I don’t bother with airline mile cards anymore and I assume I’m not getting a better deal buying physical merchandise with card ‘points’, so I never do.
Among other options in the special case of Citi Double Cash card, where you get 1% on purchase and 1% on paying, you lose the second 1% on the rewards amountby taking a statement credit, IOW it comes out 1.99%. You avoid that with a check.
As RNATB said, if the ‘cancel a purchase thing’ cancels interest accrued on the purchase from a previous statement period that would be a marginal advantage to that method. But I never run CC balances. And it would seem they’d limit you doing that (‘cancel my purchase from 10 yrs ago’ for somebody who always runs balances?)
- Though you didn’t say this was directly relevant, it’s worth repeating IMO how utterly irrelevant this is from POV of a particular consumer choosing their method of payment. If I pay cash to a merchant who doesn’t give a discount for cash, rather than my cash back CC, I pay more, period. If the merchant gives a discount for cash bigger than the CC cashback, I pay cash. I have negligible influence on how the whole market works so it’s illogical to factor ‘the societal cost’ into my decision.
It doesn’t make any difference to me whether a merchant offers a cash discount (maybe if it was like a 10% discount on a major purchase). I only carry cash for those increasingly rare instances where credit isn’t accepted or I need to tip someone.
I used to think the same thing. My method of payment doesn’t influence how much I spend.
But, the thing is, we’re probably wrong. Because the vast majority of people do spend more when they’re using a credit card than when they’re using cash. It’s possible that you (and I) are weird statistical outliers who have such abnormal psychology that whatever makes other people spend more with credit cards than cash doesn’t apply to us.
But I doubt it.
As to the OP, Gus Gusterson got it in post #4. Mental Accounting is a basic way that people are Bad With Money.
‘Studies’ of behavior economics can be useful, but tricky. They tend to set up artificial scenarios the authors infer reflect on actual real world behavior. But they might not. It’s just more tractable to study behavior that way than look at what people actually do in real life and try to control for all the variations and causes other than the one you want to study. But that doesn’t mean attempted-realistic non-real world scenarios and questions from such studies 100% reflect what people would do in real life.
Moreover with my individual decisions it really only matters who Iam, not who other people are. I take your point to a degree that a general study of people might be an indicator of the nature of me which I myself might not be able to grasp. Such a study isn’t as 100% irrelevant as say ‘the general societal cost’ of using credit cards is to my individual decision. The ‘study’ of others might indicate my own potential behavior, which is relevant. Still I place much less weight on general behavioral studies to predict my behavior than some people seem to.
Also views like yours assume it’s better for people to spend less. There are many Americans (not to exclude all other nationalities) for whom that’s obviously true, deep in debt, not prepared for retirement, dependent on the state in ways they don’t need to be. However it’s not true of everyone. It’s not true of us. Spending less than we do would be of no particular benefit to us, we’re fine as is. Especially considering that if you spend less, you get less (a basic fact which seems to be left out of the analysis by some frugality freaks on the internet, not saying that’s you BTW).
And actually I don’t think spending cash makes us spend less. Once we withdraw cash we tend to think of it as already spent, and less incentive to hold onto it. I think mainly spending cash just leaves 2%+ on the table, so why do it? Again unless there’s a >2+% discount for cash, which at the everyday store there isn’t, but dealing with some providers (contractors, the car body shop, the small furniture store run by immigrants from a cash-oriented culture, etc) there sometimes is.