The Dark Side of Credit Card Rewards

After college, I wanted to explore the world and got initiated into the world of “travel hacking.”
The idea was simple: use airline points earned from credit card rewards to travel for free1.

I leveraged this to travel to countries like Peru, Spain and Taiwan. This was done via huge sign up bonuses from credit cards and buying airplane tickets with points.

Chase Ultimate Rewards has awesome redemption on travel

I wondered how this was all possible.

With such generous rewards, why doesn’t everybody do this? What’s in it for credit card companies?

Oh, how naive I was.

According to Magnify Money, “Americans paid banks $121 billion in credit card interest in 2019.” And that’s up 56% since 2014.

The economics of credit card rewards are simple and depressing:   

Seemingly generous bonuses, points and cash back are built on top of mountains of credit card debt.


Let’s explore why credit card rewards are chump change to the companies doling them out.

The debt that powers credit card rewards

Credit card companies make $100s of dollars per customer, per year. (ValuePenguin)

Interest is what customers get charged, whereas interchange fees get charged to merchants

Interest is the bread and butter of the credit card business. It’s a lucrative business, as the the average credit card interest rate is around 16%. I’m hustling just to find a fixed 5% return, and much less 16%.

The rub? People with low credit—the ones who are least able to afford credit card debt—are the ones charged the highest amounts of interest.

“Based on your creditworthiness” means those who are less financially stable get charged more.

The equation is stacked against consumers.

Blame the devious mechanics of credit card rewards.

The Byzantine Game of Credit Card Rewards

My girlfriend’s American Express Platinum card charges a hefty annual fee. It does come with many perks, like a $200 credit for airline fees. On a connecting flight in Europe, she sprung for a $400 seat upgrade, fully expecting to nab a business class flight for half off.

Except the credit never kicked in1.

This illustrates something about credit card rewards—they’re complicated for a reason.

There are many hoops to jump through when it comes to credit card rewards.

You have to consider minimum spending amounts, annual fees, rotating categories, and getting the timing right for special offers.

Just check out the offer details on this one Chase card. How is anyone expected to remember all that?

Credit cards incentivize us to spend

Most sign up bonuses are earned after spending a minimum amount on a card in a given time frame2.

This Ink Business Cash card will give you $750…if you spend $7,500 on purchases in the first 3 months.

If you don’t normally spend that much on credit cards, then the juice is not worth the squeeze. No point in overextending oneself for what’s essentially a 10% cash back.

When it comes to credit card rewards, don’t be penny wise and pound foolish

On top of the minimum spend, banks are quickly expanding their shopping portals to incentivize even more spending.

American Express has Amex Offers. Chase, Bank of American and all other banks are rolling out “card-linked” offers — promotions specifically tied to a credit card.

Sometimes these deals are worth it.

But finding good promotions are a flash in the pan…and in general increases the desire to spend more.

I remember when Amex launched it’s $5 back for $10 (more more) purchases Small Business purchases. I drove around town with my girlfriend like crazy people hunting down small businesses to spend money on.

It totally goes against my desire for minimalism, but hey…I had some pretty good cronuts.

These rewards make us spend what we otherwise wouldn’t spend.

That’s the exact goal of promotions. If you’re a business owner, you use coupons and discounts to drive demand. No wonder 30% of all retail sales occur from Black Friday till Christmas (source). Do you really need all that cashmere underwear?

Tip: Use big, predictable purchases towards minimum spending requirements. If you own a home, then paying homeowner’s insurance is likely a big, unavoidable expense. It’s something you gotta pay anyway, so might as well use it towards a minimum spend to get a sign up bonus.

Consumers rarely redeem the full value of credit card rewards

Credit card rewards are cloaked in the language of points and miles for a reason—it’s psychology. Getting 20,000 points sounds like a big deal, until you realize it’s just $200.

Credit card points are usually worth $0.01 each, but it depends on how they’re redeemed.

For example, I have 3,000 measly points sitting in Citi right now. Here’s the rub: the minimum redemption for a gift card is 2500 points. It’s a 100:1 ratio to dollars, which is about right. But now I’m left with 500 useless points.

So I look around on Citi’s Thank You portal to see if I can redeem my points for something else, like cash back. I can, but the redemption rate is half as good. 10,000 points should get me $100, but it’ll only get me $50 here.

Dave Ramsey famous said: “We buy things we don’t need with money we don’t have to impress people we don’t like.”

The credit card rewards version would be:

We buy things we don’t need for rewards that are too little to justify those purchases in the first place.

The point (heh) is that we often forget the extra cost in time and energy we’re expending for an extra $3 off here, and 5% off there. You may be better off saving money upfront with cash back tools like Rakuten.

Consumers have to be quite savvy to stay on top of their credit cards, rewards, and how the rules change. But it’s not all bad as long as consumers have a good system in place.

And yet…I use credit cards

In exploring of the dark side of credit card rewards, it may seem like I’m against using credit cards. I’m not.

In fact, I apply to 1-2 credit cards every year, and still enjoy tons of perks like cash back and free travel.

The average American consumer doesn’t get enough actionable advice on how to master the credit card game, and often winds up paying way too much interest to these giant banks.

I’ve seen friends get into debt and it’s not a fun ride. Although it may seem like a first world problem, those with high incomes are just as likely to have high credit card debt too (source).

Here are a few quick tips:

  • Treat a credit card like a debit card/cash. Only charge what’s you can cover, and always pay in full
  • Choose a simple card you’ll actually use: I use Capital One’s Spark Business card because it gives me a flat 2% cash back on everything. I run 90% of all my spending through it.
  • Don’t overestimate rewards: Be conservative and assume you’ll only *actually* use half of the rewards offered by your credit card, unless you create a good system for keeping track of—and using—your rewards.

I’m working on an actionable guide for those to reap the maximum reward — while avoiding the pitfalls — of credit cards. It’ll teach you how to master the game of credit cards for free travel, cash back, and nice perks. If you’re interested, please leave a comment or reply to me in my newsletter.


1) A European traveler at a hostel once commented how she envied the credit card rewards Americans get. Turns out, the European Union has rules to limit fees that banks can charge, which means less budget for rewards.

2) Credit card companies earn an interchange fee, passed on to the merchant, for everyone swipe.

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