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Why do some rewards credit cards encourage large spending in the first few months?

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Credit Card Promotional Offers

You’ve probably come across numerous credit card advertisements that boast of their amazing promotional offers. If we take a closer look at them, we find a common formula sketched out to generate these packages.

“Earn 10,000 Membership Rewards Points after you make $1,000 in purchases with your new Card in the first three months”. -American Express EveryDay Credit Card

The part in bold seems to stay consistent for every card offered by every credit card company. But why do they encourage large spending in the first few months?

It is common knowledge that people spend more when they are using credit cards than they do when paying cash. This psychology is easy enough to comprehend. If a payment is cash based, people will be careful while deciding to go through with it or not. On the other hand, if they are given the option to pay with their credit card, they won’t be the least bit hesitant.

This is because cash payments are immediately perceptible. It’s actual money leaving your pocket and when you spend it it’s gone. Whereas a credit card seems to be a magical piece of plastic that will get you what you want without feeling the money disappear – at least not for a month.

The answer to our question is simple: credit card companies want you to develop the habit of large spending with your credit card without thinking twice on every purchase. They want you to focus on the rewards you’ll be getting rather than the actual cost you’ll be charged. But most importantly, credit card companies want you to tell yourself that “it’s okay to buy it because I’ll be getting cash back (or rewards)”.

Dun and Bradstreet’s studies in this regard are often cited in which the company claims that the average consumer spends 12% to 18% more when using credit cards.  This is evident from the following two examples.

Large Spending at McDonald’s

Studies show that people have been spending more on average at McDonald’s since the fast food chain incorporated a credit card payment system into their franchises.The regular purchase went up from $4.50 to a surprising $7.00.

Large Spending at High Tollbooths

States that charge highway tolls are anticipated to charge more money when they replace the cash payment modules with electronic toll collection. Giving people the option to pay with credit cards provides you an opportunity to make more money off of them. These states are making use of this by charging more simply because credit card debt isn’t “real” until the statement shows up in your mailbox.

Conclusion

The bottom line here is that credit cards can be very convenient if used appropriately. If you rack up a huge debt on them by giving into the temptation of impulsive spending then it’s going to cause you considerable financial damage. Avoid large spending when using credit cards. Whether you make purchases with cash or credit, always remember that it is real money that you’re spending.

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