As of this week, American Express cardholders can now earn reward points towards McDonald’s menu items. One dollar in spending accumulates one point, which can then be spent at the golden arches. For example, a happy meal can be purchased for approximately 300 points.

But wait, doesn’t that equate to spending $300 on a “free” happy meal?

The Reward Points Don’t Add Up

A bacon and cheese quarter pounder will cost the AmEx customer just 400 points, or $400 worth of spending on their credit card. If the consumer already spent that much on their card, that quarter pounder really was a freebie.

The question is, does the added rewards perk encourage extra spending? The answer is no, and yes!

I doubt that a credit card user would spend more at the grocery store, or the gas pump, or Amazon.com, contemplating that an extra few dollars would inch them towards their “free” McDonald’s meal.

Unless you really love McD’s, you’re not going to spend an extra few hundred on clothing just to purchase an additional quarter pounder.

After all, even the least conscientious consumers understand that $400 on a credit card doesn’t really balance out a single hamburger that could be purchased the old-fashioned way for $4.

The Increase Occurs at the Register

The extra spending for the rewards card customer occurs at the McDonald’s register. Upon obtaining a free goodie, the consumer will generally proceed to order additional items that wouldn’t have been purchased had he never entered the fast food joint.

Rather than driving on by and spending $0 at McDonalds, the consumer stopped in for a free burger and left with a credit card increase of $20. Even if he only paid for the free burger, at some subsequent trip to redeem rewards points the bill will eventually inflate past the free item.

The Real Problem

The real problem here isn’t that the customer possibly ends up paying a meal’s worth more on their card than they would have otherwise, it’s that the very existence of the card in the user’s wallet indicates that they are likely to spend more across all budgeting categories.

According to a study done by Dun and Bradstreet, credit card carrying consumers spend 12%-18% more than their cash using counterparts. *Note that this study did not compare credit and debit cards.

I expect there would be little variance in the spending on these two types of cards. I myself have used both the cash-based envelope system, and a credit card system (using budgeting software to track spending), and can attest to the fact that I spent more money when using plastic than when I had to hand cash to the clerk. It makes sense that the envelope system keeps us from overspending. When the envelope is empty, the spending is done. A credit card doesn’t have that same protection.

Does using good financial software with a frequently consulted app provide nearly the same psychological benefit as cash? I’ll tackle this topic in the future.

Debit vs. Credit vs. Cash: What’s the Solution?

The most conservative among us would argue that a cash only system is the sole solution to this overspending problem. What about credit cards vs their debit counterparts?

Sure, debit cards encourage easy spending on the same level as their evil credit cousins, but at least there is the security that the money is withdrawn from your personal account and not tallied up past your ability to pay.

Does this debit protection outweigh the possible benefits of a rewards card?

What’s your take; can rewards cards be used responsibly, or are they unnecessary and harmful?