Rewards Points

How do you use rewards points from credit card purchases? Seems like a simple enough question, but here’s an interesting approach. I use them as a scoring system to track two metrics; my long term spending history and how effectively I spend my money.

Firstly, I should note that I almost exclusively use credit cards to facilitate financial transactions because of all the conveniences. Many people will disagree because much research shows that people spend more money when they work outside the immediate tangible form of M1 money (i.e cash), and that the use of abstractions of money (i.e. tokens, mortgage debt, pieces of plastic representing lines of credit, etc) encourages people to spend because they cannot calculate out the true cost of their spending. I am pretty sure I am a counter example, not because I’m crazy and break the rules of rationality, but because my primary definition of “cash” is “numbers on a screen.” I am better at tracking numbers, adding and subtracting in a mental check book than adding and subtracting how many one dollar, five dollar, ten, twenty, etc bills I have in my possession. Framed in this context, tracking cash is akin to how in traditional societies farmers would gauge their net worth by number of cows, bushels of wheat, count of hard working children, carts, etc that could be protected on their land. My concept of money is likely jaded by the fact that I’ve easily interacted with over a trillion dollars through computer screens through work when I worked in banking.

That background aside, how do I use rewards points to track my money and optimize spending? It’s not a perfect system, but it’s far better than what exists today. Have you noticed how banks hide long term detailed records of your spending and that there is no “lifetime spending” balance. I’ve observed this for a while now, but it really bothered me today when Amex mobile would only show me 1 week of purchasing details. It may be presented under the guise of “convenience and simplicity,” which can be helpful at times, but I believe it is really a way to obscure from my knowledge just how much money I’ve wasted. Quite likely, my detailed spend is being stored and analyzed methodically to promote greater spending. Maybe this is an implicit rule of a consumerism society; lubricate spending by subtle manipulations and omissions of data to influence spending behavior.

Perhaps that is why credit card companies created highly incentivizing rewards points systems. If you know you can get 3 points for every dollar spent, aka 3% rewards, wouldn’t that add up to a free item after every 33 purchases or 3% cash back in your pocket? Yes, those equalities are true, but they also encourage more spending. I don’t usually pay attention to how many points I get, unless it coincides with necessary or planned purchases. I prefer to look at rewards points as a subsidy from cash shoppers. What do I mean by this. Credit card machines, transaction fees, and payment risk are all costs incurred by vendors, but the opportunity cost of not adopting credit is even higher because they will lose a lot of potential customers, however they cannot price discriminate between cash and credit payers (yet), so to cover the cost of credit, companies raise prices. The overall effect is that cash users pay more than they should and credit card users pay less than they should. In addition to that, the rewards points have cash value, so credit card users are in fact paying less than cash users for purchases. You might even throw on some additional convenience value add for using credit.  That’s why I use credit cards almost exclusively.

On a final note, I make sure to hold enough in my bank account to auto pay off my cards in full each month to avoid interest fees and take advantage of inflation during the grace period, but that’s for another post.

-fp

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~ by fp on February 9, 2013.

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