How can we minimize the credit card rewards paradox? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Bryce Galen, Founder & CEO of Zero, on Quora:

The credit card rewards paradox refers to the fact that using credit cards for your spending allows you to earn rewards that you wouldn't otherwise earn, but doing so makes you more likely to overspend, and potentially even end up in debt.

Credit cards are often able to give rewards while debit cards cannot because of the laws and rules surrounding interchange fees. Interchange fees are processing costs paid by a merchant who accepts cards to a card-issuing bank, and they're higher for credit cards than debit cards.

To be a smart consumer, it would seem, you should be taking advantage of credit card-only rewards to get a rebate on spending that you would otherwise be doing anyway. The problem is that the more credit cards you have, the harder it is to track things, leading you to overspending and potentially long-term debt.

Many people think they're immune to this problem. After all, the discipline required to investigate various credit card reward offers lends itself to a self-determined belief in one's own spending discipline. But the more you study the principles of behavioral economics, the more you realize that simply using a credit card leads you spend more money because it reduces the emotional friction associated with making purchase decisions.

According to Dave Ramsey, the average person using a credit card at a vending machine spends 178% more - getting a drink, a candy bar, and a bag of chips when they were originally just planning to get a drink. This same principle repeats itself on a larger scale -- when you use a credit card, you'll spend more because you're separating the connection between your bank balance and your spending. Airline miles cards are the worst offenders -- Ramsey says that the people who use them are massively in denial and really do believe they are beating the banks at their own game.

Credit card rewards blogs benefit financially from this trend and are heavily incentivized to perpetuate the myth that having more cards is smarter -- to the extent that The Points Guy recently said "having 20 credit cards or more is smart financial planning."

The best way to beat the effects of the credit card rewards paradox is to use a credit card that offers a flat cash back rate on all spending and establish a way of tracking your spending in real time. This can be done either with three products: a traditional credit card, a high-yield checking account at a traditional bank, and a financial tracking tool like Mint that you monitor in real-time, or it can be done with seamlessly with one product, Zero.

Zero is a bank replacement that combines the simplicity of a debit card with the cash back of a credit card. According to the New York Times, its solid-metal, no-annual-fee Carbon card is "a better overall offer than almost any credit card"[1] and it comes with the ability to get unlimited 3% cash back on purchases, 2% on FDIC-insured net deposits, free ATMs worldwide, and 24/7 support. Customers start out earning less and level up after inviting four people who become new customers and add direct deposit. Get Zero from the App Store for iOS or Google Play Store for Android.


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