I used to be obsessed with credit card rewards. I had spreadsheets tracking cashback percentages, I changed cards for different purchase categories, and I never missed a signup bonus. However, after two years of chasing points, I realized something disturbing. Despite paying my balance in full every month, I was spending way more money than before I started “optimizing” my rewards.

The Rewards Optimization Trap

Here’s how it started for me. I got my first rewards card and felt smart every time I earned cashback. Then I discovered that different cards offer better rewards for different spending categories. Consequently, I signed up for multiple cards to maximize every purchase. Moreover, I started looking for excuses to spend just to earn more points.

The logic seemed sound. If I was going to spend money anyway, why not get 5% back instead of 1%? However, this thinking contains a dangerous assumption – that my spending was already fixed. Instead, the pursuit of rewards slowly increased how much I spent overall. Furthermore, I started making purchases I wouldn’t have made otherwise, all justified by the rewards I’d earn.

According to research from the Federal Reserve, credit card users spend approximately 12-18% more than cash users, even when controlling for income and other factors. Additionally, rewards cards amplify this effect because they add another psychological incentive to spend.

The Mental Accounting Problem

Credit card rewards create what economists call “mental accounting errors.” Basically, we treat reward dollars differently than regular dollars. When I earned $50 in cashback, I’d often spend it on something frivolous because it felt like “free money.” On the other hand, if I’d simply kept that $50 by not making unnecessary purchases in the first place, I would’ve been better off.

Think about it this way. If you spend $1,000 to earn $20 in rewards, you haven’t gained $20. Instead, you’ve spent $980. But because the reward feels separate from the spending, we focus on the $20 “gain” rather than the $980 loss. Therefore, we feel good about ourselves while actually spending more money.

I once bought a new laptop because I’d get 5% back and hit a signup bonus threshold. The purchase felt justified because of the rewards. However, my old laptop worked fine. Similarly, I could’ve waited for a sale and saved way more than the rewards were worth. The rewards didn’t save me money – they cost me money by triggering a purchase I didn’t need.

Understanding the psychological mechanisms behind credit card spending reveals why even financially savvy people fall into these traps.

The Social Comparison Game

Credit card rewards have created a weird competitive culture. People brag about their points balance and redemption strategies. Moreover, there are entire online communities dedicated to maximizing credit card benefits. As a result, credit cards have become a status symbol beyond just the metal card itself.

I found myself feeling proud when I optimized a purchase perfectly. Furthermore, I’d share my “wins” with friends who were also into rewards chasing. This social validation reinforced the behavior. Consequently, I was spending more time thinking about credit cards than about whether I actually needed the things I was buying.

There’s also an interesting dimension to how credit cards function as social currency that influences our spending in ways we rarely acknowledge.

The Signup Bonus Treadmill

Credit card signup bonuses are particularly dangerous. They offer large rewards if you spend a certain amount in the first few months. However, these spending requirements push you to make purchases earlier than you normally would. Additionally, they encourage you to put more spending on credit cards instead of using debit or cash.

I signed up for a card offering $500 after spending $3,000 in three months. That seemed easy until I realized I was looking for things to buy just to hit the threshold. I paid annual expenses early. I bought gifts months in advance. Moreover, I made home improvements I’d been putting off. The $500 bonus felt great, but I’d accelerated $3,000 in spending and probably bought some things I would’ve skipped entirely.

The cycle continues because there’s always another signup bonus available. Therefore, you’re constantly opening new cards and trying to hit spending thresholds. Meanwhile, you’re spending more overall while feeling smart about gaming the system.

The Opportunity Cost Nobody Calculates

Here’s what really changed my perspective. I started tracking not just my rewards, but also my total spending compared to before I had rewards cards. The results shocked me. Despite earning hundreds in cashback annually, my total spending had increased by thousands.

Even worse, the time I spent managing cards, tracking categories, and optimizing purchases was significant. Additionally, this mental energy could’ve been used for actually earning more money or enjoying my life. Instead, I was essentially working a part-time unpaid job as a credit card optimizer.

Research from Cornell University shows that payment method transparency affects spending behavior significantly. When we can’t easily see money leaving our account, we spend more freely. Credit cards, especially those with rewards, create maximum distance between spending and payment.

The Merchant Fee Reality

Let’s talk about something credit card companies don’t advertise. Those rewards you earn come from somewhere, and it’s not the credit card company’s profits. Rather, merchants pay fees of 2-3% on every credit card transaction. Furthermore, merchants raise prices to cover these fees, meaning everyone pays more whether they use credit cards or not.

So when you earn 2% cashback, you’re really just getting back some of the extra cost already built into the price. Moreover, people who pay cash are essentially subsidizing your rewards through higher prices. This system makes credit card rewards feel like a benefit when they’re actually just redistributing costs.

Breaking Free from the Rewards Mindset

After realizing all this, I made some changes. First, I reduced my credit cards from five to two. Instead of chasing category bonuses, I simplified my financial life. Additionally, I stopped checking my rewards balance obsessively because it only encouraged more spending.

Second, I started using a debit card for small purchases. This small change made spending feel more real because I could see my bank balance decrease immediately. Consequently, I became more thoughtful about purchases. Similarly, I stopped treating cashback as “free money” and started seeing it as a tiny discount on purchases I’d already decided to make.

Third, I implemented a waiting period for non-essential purchases over $50. Even if I’d earn great rewards, I’d wait 48 hours before buying. This simple rule eliminated probably 30% of my unnecessary spending. Therefore, I saved far more than I ever earned in rewards by simply not buying things.

What Actually Makes Sense

I’m not saying you should never use credit cards or earn rewards. Rather, I’m suggesting we need a more honest conversation about their true cost. If you’re genuinely spending the same amount you would without rewards, then yes, you might as well earn cashback. However, most people aren’t that disciplined.

A better approach is to use one simple cashback card for everything and ignore the optimization game entirely. Additionally, focus on earning and saving more money rather than spending more efficiently. Furthermore, be brutally honest about whether rewards are actually saving you money or just making you feel better about spending more.

The Bottom Line

Credit card rewards are designed to increase spending, not to benefit consumers. They work by exploiting psychological biases that make us spend more than we otherwise would. Moreover, they create elaborate justification systems that make us feel smart while actually costing us money.

The credit card industry wouldn’t offer rewards if they weren’t profitable. Those profits come from increased spending, interest charges, and merchant fees. Therefore, the house always wins this game. The only way to truly win is to spend less overall, which means largely ignoring the rewards optimization rabbit hole.

Next time you’re about to make a purchase for the rewards, ask yourself honestly – would I buy this without the cashback? If the answer is no, then that reward is actually costing you money. Similarly, if you find yourself thinking about credit card categories more than your actual budget, you’ve probably fallen into the optimization trap.

The smartest financial move isn’t maximizing credit card rewards. Instead, it’s minimizing unnecessary spending regardless of what rewards you might earn. That’s a harder truth to accept than the fantasy of gaming the system, but it’s the one that actually builds wealth.