Research shows that people tend to spend more when using credit cards, make more impulse purchases, and even leave larger tips. Rewards programs can reinforce those habits since each purchase feels like a step towards something valuable, which can make it harder to stick to a budget.
The good news is that being aware of how these programs influence your behaviour can help you decide whether you need a purchase or whether you’re shopping just to earn rewards.Plus, we’ll show you how to make the most of rewards programs without going into debt.
The psychology behind spending
Have you ever noticed that if you have a reward offer, you end up spending more than you intended, even if you’re getting a discount or earning points? That the overspend effect. Companies have learned that customers are willing to spend more if they feel like they’re being rewarded for it.
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The overspend effect isn’t the only psychological behaviour that marketing teams lean on. Giving freebies for meeting spending milestones is a good example. A company might give a $10 voucher after a customer makes 3 purchases of $50 or more. This reinforces spending habits and loyalty. Someone might be willing to spend just a little bit more in order to earn a “freebie” or forgo buying the same items somewhere else since they don’t earn rewards with the competitor.
Linking memberships with credit cards makes it even easier to make purchases without really thinking about them. And with the huge growth of online shopping, you don’t even have to physically reach for your card to make a purchase.
MIT study on brain and spending
A well-known study explored how the brain responds when you buy something using a credit card. It found that credit card spending sensitizes the reward centre of your brain, making purchases feel more gratifying. This counters the previous assumption that credit-card spending is popular because it reduces the “pain” of spending money.
Instead, the study suggests that people spend more because it triggers the reward networks of the brain. Think about it. You’re browsing items online and you put them into your cart. You might experience a sense of anticipation and completing your purchase just makes you feel good. You probably don’t feel the same way when you read through your credit card statement weeks later.
Shopping online does an even better job of reinforcing and rewarding spending. You’re not queuing up in a store with other people or awkwardly inserting your credit card while making small talk. Instead, you click a few buttons and the purchases arrive at your home days later.
How reward programs exploit the overspend effect
It’s easy to forget that loyalty reward programs track your spending habits. That’s why they can offer rewards that you’re genuinely interested in. Technological advances have made it even easier for companies and credit card issuers to deliver hyper-targeted, personalized offers.
Retailers and credit card companies can see how often you’re shopping, what you buy, and the price points you tend to stick to. So, if you haven’t made a purchase in a few months, you might suddenly receive an offer that’s designed to get you back in the store (or using your credit card).
For instance, you might get a discount code giving you $5 off a $10 purchase. Are you really going to be able to limit yourself to a $10 shopping trip? Chances are, you’ll spend more than that, but you won’t mind as much because you have a $5 discount. In this example, the reward program offer leveraged the overspend effect and reinforced your loyalty to the store.
If you earn rewards through a credit card that has an annual fee, you’re automatically encouraged to spend since you have to earn enough rewards to justify the fee. The higher the annual fee, the more you’re likely to spend.
How to earn rewards without going into debt
By this point, you might assume we’re not fans of credit card rewards, but that’s not true. A lot of spending is necessary, so why not earn rewards on it?
To ensure you’re not just spending to chase rewards, follow these simple guidelines:
- Rely on a realistic budget. Using a credit card without knowing whether you’ll be able to pay off your purchases in full can quickly lead to debt. If you carry a balance, you’ll be charged interest, and missing a payment can trigger additional fees. To avoid this, track your monthly income and expenses so you know how much discretionary money you have to spend.
- Make a debt repayment plan if you have a credit card balance. Once you know your exact income/expenses for the month, you can make goals for paying down your balance. Ideally, you’ll stop charging to the card, so the payments you make will immediately start working down your balance. Be prepared for a little inconvenience as you switch to carrying cash or paying with your debit card.
- Participate in a rewards program that doesn’t require using a credit card. Resist the temptation to chase credit card rewards by joining a free loyalty rewards program like PC Optimum, Scene+, Triangle Rewards, or More Rewards.
- Only charge to your credit card if you can quickly pay off the purchases. You might just charge bills and recurring payments that you know you can pay off right away. This way, you’ll be rewarded for purchases you have to make. Stick to debit cards and cash for discretionary spending.
- Use a credit card with no annual fee. If you have a credit card with an annual fee that’s hundreds of dollars, you’ll have to use the card and earn rewards to offset the cost. Instead of starting off in the hole, use a no-fee credit card (or one with a very low annual fee), so you won’t feel pressured to spend on it in the first place.
The bottom line
Credit card issuers are great at using strategies that motivate people to spend more. Understanding the psychology behind rewards purchases can actually make it easier to resist spending—especially spending solely to earn rewards.
By having a plan in place for buying things you truly need, you’ll earn rewards for necessary purchases without overextending your budget. But if you’re struggling to stick to your plan or you need help figuring out a spending strategy, consider working with a non-profit credit counselling agency.
Jessica Gibson
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